2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Taxable Period...................................................................................... 18
Concept of Income .............................................................................................. 18
Definition ................................................................................................................... 18
When Income is Taxable ............................................................... 18
Test in Determining Whether Income is Earned for Tax
Purposes................................................................................................................................. 19
i. Realization Test or Severance Test ........................................ 19
Definition ......................................................................................................................1 ii. Economic Benefit Test or the Doctrine of Proprietary
Purpose ..........................................................................................................................1 Interest 19
iii. Claim of Right Doctrine or Doctrine of Ownership,
Command or Control............................................................................................... 19
iv. Income from Whatever Source ................................................ 19
Lifeblood Theory .....................................................................................................3 v. Tax Benefit Rule .................................................................................. 19
Necessity theory.......................................................................................................4 Methods of Accounting................................................................... 20
Benefits-Protection Theory (Doctrine of Symbiotic- i. Distinguish: Cash and Accrual Method................................ 20
Relationship) ................................................................................................................................4 ii. Installment and Deferred Sales or Transaction ............ 20
iii. Percentage of Completion ............................................................ 21
Situs of Income ...................................................................................................... 21
Fiscal adequacy.........................................................................................................4 Gross Income .......................................................................................................... 21
Administrative feasibility ..................................................................................4 Definition ................................................................................................................... 21
Theoretical Justice ..................................................................................................4 Distinguish: Gross Income, Net Income, and Taxable
Income 22
Sources of Income Subject to Tax............................................................. 22
Inherent Limitations .............................................................................................4 i. Compensation Income.................................................................... 22
Constitutional Limitations ................................................................................6 ii. Fringe Benefits ..................................................................................... 22
Due Process .................................................................................................................6 iii. Income from Business, Trade or Profession ................... 23
Equal Protection Clause ....................................................................6 iv. Income from Dealings in Property ......................................... 24
Freedom of Religion ..............................................................................................7 v. Passive Investment Income ........................................................ 25
Non-Impairment Clause....................................................................7 vi. Annuities and Proceeds from Life Insurance or Other
Traditionally Exempt Taxpayers..................................................................8 Types of Insurance.................................................................................................... 27
Non-Stock, Non-Profit Education Institutions ....................................9 vii. Prizes and Awards ............................................................................. 27
Non-Stock, Non-Profit Hospital....................................................9 viii. Pension, Retirement Benefit, or Separation Pay........... 27
Uniformity, Equitability and Progressivity of Taxation Exclusions ................................................................................................ 27
10 i. Rationale................................................................................................... 27
Non-Imprisonment for Non-Payment of Poll Taxes....................10 ii. Taxpayers Who May Avail ........................................................... 27
Origin of Revenue, Appropriation and Tariff Bills.........................10 iii. Distinguish: Exclusions, Deductions and Tax Credit.. 27
Flexible Tariff Clause ........................................................................11 iv. Exclusions Under the Constitution......................................... 28
Non-Impairment of Supreme Court’s Jurisdiction........................11 v. Exclusions Under the Tax Code [Sec. 32(b), NIRC] ..... 28
Taxation by the LGU..........................................................................11 Deductions................................................................................................................ 30
Voting Requirement of Tax Exemptions ............................11 General Rules.......................................................................................................... 30
Concept of Return of Capital ....................................................... 30
Distinguish: Itemized Deductions and Optional Standard
Deductions............................................................................................................................ 30
Itemized Deduction (Requisites for Deductibility) ..... 31
Prospectivity of Tax Laws ..............................................................................12 i. Bad Debts ................................................................................................. 31
Imprescriptibility .................................................................................................12 ii. Interest Expense ................................................................................. 31
Situs of Taxation....................................................................................................12 iii. Taxes ........................................................................................................... 32
Double Taxation....................................................................................................12 iv. Ordinary and Necessary Expense........................................... 33
Strict Sense (Direct Double Taxation)....................................................12 v. Depreciation Expense ..................................................................... 34
Broad Sense (Indirect Double Taxation)............................12 vi. Depletion Expense............................................................................. 34
Tax Treaties as Relief from Double Taxation....................................13 vii. Loss............................................................................................................... 34
Escape from Taxation........................................................................................13 viii. Charitable Contributions............................................................... 35
a. Shifting of Tax Burden ......................................................................................14 ix. Pensions and Trusts ......................................................................... 35
Distinguish: Tax Avoidance and Tax Evasion .................14 x. Research and Development Expense................................... 35
Exemption from Taxation ..............................................................................14 Items not Deductible ......................................................................................... 35
Equitable Recoupment.....................................................................................15 Income Tax on Individuals ............................................................................ 35
Prohibition on Compensation and Set-Off..........................................15 Resident Citizens, Non-Resident Citizens, and Resident Aliens
Compromise ............................................................................................................15 35
Tax Amnesty ............................................................................................................15 i. Coverage ................................................................................................... 36
ii. Taxation on Compensation Income ...................................... 36
iii. Taxation of Business Income/Income From Exercise of
Profession........................................................................................................................ 36
iv. Taxation of Partners in a General Professional
Partnership .................................................................................................................... 36
v. Taxation of Passive Income......................................................... 36
Definition, Nature, and General Principles .........................................16 vi. Taxation of Capital Gains............................................................... 36
Income Tax Systems ..........................................................................................16 vii. Aliens employed by Regional Headquarters, Regional
i. Global...........................................................................................................16 Operating Headquarters, Offshore Banking Units, and Petroleum
ii. Schedular ..................................................................................................16 Service Contractors .................................................................................................. 37
iii. Others..........................................................................................................16 viii. Rules on Other Sources of Income.......................................... 38
Features of the Philippine Income Tax Law.....................16 Income Tax on Corporations ....................................................................... 38
Criteria in Imposing Philippine Income Tax......................................16 General Principles ............................................................................................... 38
General Principles of Income Taxation................................16 Domestic Corporations .................................................................. 38
Types of Philippine Income Taxes............................................................16 i. Taxation in General ........................................................................... 38
Kinds of Taxpayers..............................................................................................17 Resident Foreign Corporations.................................................................. 38
i. Individual TP ..........................................................................................17 Other Business Entities .................................................................. 39
ii. Corporate Taxpayers........................................................................17 i. Unregistered Partnership............................................................. 39
iii. Estates.........................................................................................................17 ii. Co-Ownership....................................................................................... 40
iv. Trusts ..........................................................................................................17 Minimum Corporate Income Tax ............................................................. 40
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Proprietary Educational Institutions and Proprietary Imposition of VAT................................................................................................ 61

Hospitals .................................................................................................................................41 On Sale of Goods or Properties................................................................... 61
Improperly Accumulated Earnings Tax..............................41 i. Tax Base: Gross Selling Price ...................................................... 61
Exempt Corporations.......................................................................42 ii. Transactions Deemed Sale........................................................... 62
Branch Profit Remittance Tax .....................................................................42 iii. Change or Cessation of Status as VAT-registered
Gross Philippines Billing Tax........................................................................42 person 62
Filing of Returns and Payment ...................................................................43 On Importation of Goods............................................................... 62
Requirements for Filing an ITR ..................................................................43 Sales of Services of Goods (SOSG) and Use or Lease of
Taxation of Married Individuals ...............................................43 Properties.............................................................................................................................. 62
Taxation of Minors ..............................................................................................43 i. SOSG............................................................................................................. 62
Summary of Rules ..............................................................................44 ii. Use or Lease of Properties............................................................ 63
Administrative Requirements.....................................................................44 Zero-Rated and Effectively Zero-Rated Transactions ................ 63
i. Individual Taxpayers........................................................................44 VAT Exempt Transactions............................................................................. 63
ii. Corporate Taxpayers........................................................................44 Sale of Agri-Food in their Original State............................................... 63
Sale of Importation of Fertilizers/Seed/Seedlings...... 64
Basic Principles, Concept and Definition .............................................44 Importation of personal and household effects belonging to the
Definition and Concept.....................................................................................44 residents of the PH returning from abroad and nonresident citizens
Doctrines Supporting the Imposition of Estate Tax....45 coming to resettle in the PH ..................................................................................... 64
Valuation of the Gross Estate .......................................................................45 Importation of professional instruments and
Classification of Decedent...............................................................................45 implements, wearing apparel, domestic animals, and personal
Composition of Gross Estate.........................................................................45 household effects ............................................................................................................. 64
Items to be Included in Determining Gross Estate (Inclusions) Services subject to Percentage Tax ......................................................... 64
46 Services of Agri-Contract growers ........................................................... 64
i. Decedent’s Interest ............................................................................46 Medical, dental, hospital and veterinary services except
ii. Transfer in Contemplation of Death ......................................46 those rendered by professionals........................................................................... 64
iii. Revocable Transfers .........................................................................46 Educational Services rendered by Private Educational
iv. Property Passing under a General Power of Institution duly accredited by DepEd, CHED, and TESDA and those
Appointment .................................................................................................................46 rendered by governmental educational institution................................. 64
v. Proceeds of Life Insurance ...........................................................47 Services rendered by individuals pursuant to an EE-ER
vi. Prior Interest..........................................................................................47 Relationship......................................................................................................................... 65
vii. Transfer for Insufficient Consideration (TFIC) ..............47 Services rendered by regional or area HQs established in the
Allowable Deductions from Gross Estate...........................48 PH by multinational corporations........................................................................ 65
i. Ordinary Deductions ........................................................................48 Transactions which are exempt under international
ii. Special Deductions .............................................................................50 agreements to which the PH is a signatory or under special laws 65
Exclusions from Gross Estate and Exemptions of Certain Sales by agri-coops duly registered with the Cooperative
Acquisition and Transmissions ..............................................................................50 Development Authority (CDA)............................................................................... 65
i. Exclusive Property of Spouses...................................................51 Gross receipts from lending activities by credit or
ii. Merger of the Usufruct in the Owner of the Naked Title multi-purpose coops duly registered with the CDA ................................ 65
51 Sales by non-agricultural, non-electric and non-credit
iii. Transmission or delivery of the inheritance or legacy coops duly registered with the CDA ................................................................... 65
by the Fiduciary Heir to the Fideicommissary.......................................51 Export sales by persons who are not VAT-registered
iv. Transmission of the Legacy from the 1stheir to the 2nd 65
heir 51 Sale of RP-CA & Sale of Residential Lot and Residential
v. Bequest, Devise or Legacies.........................................................51 House and Lot..................................................................................................................... 65
vi. Benefits by reason of Social Legislation ..............................51 Sale of Residential Units................................................................. 65
Tax Credit for Estate Taxes paid to a Foreign Country Sale, importation, printing or publication of books and any
51 newspaper, magazine review or bulletin which appears at regular
i. Foreign Estate Tax Payments.....................................................51 intervals with fixed prices for subscription and sale and which is not
ii. Reciprocity Rule...................................................................................51 devoted principally to the publication of paid advertisements....... 66
Administrative Requirements.....................................................................52 Transport of passengers by international carriers ...................... 66
i. Filing of Estate Tax Return ...........................................................52 Sale, importation or lease of passenger or cargo vessels and
ii. Filing of Statement or Certificate from a CPA..................52 aircraft, including engine, equipment and spare parts thereof for
iii. Electronic Certificate Authorizing Registration (ECAR) domestic or international transport operations ........................................ 66
and Withdrawal of Cash from Bank Accounts .......................................53 Importation of fuel, goods and supplies by persons
engaged in international shipping or air transport operations....... 66
Basic Principles, Concept, and Definition ............................................54 i. Transport of Passengers................................................................ 66
Requisites of a Valid Donation ....................................................................54 ii. Sales of Services of Goods (SOSG) and Use or Lease of
Transfers which may be considered as Donation .........................55 properties........................................................................................................................ 66
a. Condonation of Indebtedness .....................................................................55 Services of bank, non-bank financial intermediaries
Transfer for Insufficient Consideration...............................55 performing quasi-banking functions, and other non-bank financial
Waivers .......................................................................................................................55 intermediaries.................................................................................................................... 66
Renunciation ..........................................................................................55 Sale or lease of goods and services to senior citizens
Classification of Donor ......................................................................................56 and persons with disability....................................................................................... 66
Deductions/Exemptions from Gift Tax.................................................56 Transfer of property pursuant to Section 40(C)(2) of the NIRC
Tax Treatment of Political Contributions ............................................56 66
Filing of Return and Payment......................................................................57 Association dues, membership fees, and other
assessments and charges collected by homeowners’ associations
Nature and Characteristics of VAT...........................................................57 and condominium corporations ........................................................................... 66
Tax on Value Added............................................................................................58 Sale of gold to the Bangko Sentral ng Pilipinas (BSP)................. 66
Sales Tax....................................................................................................58 Sale of drugs and medicines prescribed for diabetes,
Tax on Consumption..........................................................................................58 high cholesterol, and hypertension beginning January 1, 2019...... 66
Indirect tax: Impact and Incidence of Tax..........................58 Sale or lease of goods or properties or the performance
Tax Credit Method ...............................................................................................59 of services other than the transactions mentioned in the preceding
Destination Principle and Cross-Border Doctrine ........................59 paragraphs 66
Persons Liable to VAT .......................................................................................60 Input and Output Tax........................................................................................ 67
Ordinary Course of Business........................................................................60 Tax Credit Mechanisms ................................................................................... 67
Sale of OA v. Sale of CA.....................................................................61 Tax Credit Certificate ....................................................................... 67
Classification of Real Property (RR 7-2003) .....................................61 Transitional Input Tax...................................................................................... 67
i. TP is engaged Real Estate..............................................................61 Presumptive Input Tax................................................................... 68
ii. TP is not engaged in the Real Estate business.................61 Refund or Tax Credit of Excess Input Tax; Procedure ............... 68

General Principles................................................................................................68
Section 112 vis-à-vis Section 229 ............................................69
Procedure ..................................................................................................................70
Filing of Returns and Payment ..................................................71
i. VAT Return..............................................................................................71
ii. Income Tax Return ............................................................................71
Administrative Claim for Refund ..............................................................73
i. Section 112..............................................................................................73
ii. Section 229..............................................................................................73
Judicial Claim for Refund.................................................................................73
i. Section 112..............................................................................................73
ii. Section 229..............................................................................................73
Compliance Requirements ............................................................................73
Registration & Invoicing Requirements ...............................................73
Withholding of Final VAT on Sales to Government ....75
Administrative and Penal Sanctions .......................................................75
Tax Administration: Its General Concepts ..........................................75
Extent of Congress’ Power in Tax Administration ........................75
Bureau of Internal Revenue..........................................................................75
In General...................................................................................................................76
Interpretation of Tax Laws...........................................................76
i. Non-Retroactivity of Rulings.......................................................76
i. Operative Fact Doctrine .................................................................76
ii. Cases that may or may not be elevated to the CTA .....77
Examination of Books of Accounts ..........................................................77
i. Requirement of Issuance of a Letter of Authority (LOA)
77
ii. Third Party Verification Rule......................................................77
iii. Inquiry into Bank Deposits ..........................................................77
iv. Summon Persons; Take Testimony .......................................78
v. Commencement Order by a Rehabilitation Court .......78
Power to Assess and Prescribe Requirement for Tax
Administration ...................................................................................................................78
i. Power to Examine Returns ..........................................................78
ii. Power to make a Return ................................................................78
iii. Power to Conduct Inventory Taking, Surveillance, and
to issue Presumptive Gross Sales/Receipts.............................................80
iv. Termination of Taxable Period .................................................80
v. Fixing of Real Property Values...................................................80
vi. Accredit Tax Agents ..........................................................................80
vii. Power to Prescribe Procedural/Documentary
Requirements ...............................................................................................................80
viii. Power to Delegate ..............................................................................81
ix. Enforcement of Police Powers...................................................82
x. Authority to Abate and Compromise Tax Liabilities..82
The Rule of Estoppel in Relation to Tax Administration ..........83
Against the Government .................................................................................83
Against the Taxpayer .......................................................................83
Assessments and its Governing Principles.........................................83
Process of Assessment......................................................................................83
What Constitutes and Assessment .........................................83
Statute of Limitation on Assessment of Internal Revenue Taxes
85
i. Prescriptive Period to Assess and Collect ..........................85
ii. Ordinary Period ...................................................................................85
iii. Extra Ordinary Period .....................................................................86
Waiver of the Statue of Limitations........................................87
Suspension of the Prescriptive Period (S223) .................................88
Summary; Process of Assessment............................................................89
Remedies of Taxpayers before Payment..............................................90
a. Protest..........................................................................................................................90
i. Requisites of a Valid Protest ........................................................90
ii. Kinds of Protest ....................................................................................90
iii. What should be protested? ..........................................................91
iv. Effect of a Protest on the Period to Collect Deficiency
Taxes 91
v. Failure of the BIR to act within the 180-day period ...91
vi. Administrative Actions taken during the 180-day
period 92
vii. Effect of a Protest filed out of time ..........................................92
viii. Remedies from denial of the protest .....................................92
Compromise ...........................................................................................92
Remedies of Taxpayers after Payment .................................................93
a. Refund..........................................................................................................................93
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Procedure in filing a claim for refund................................... 93
Period within which to file a claim for refund ................................. 93
Grounds for filing a claim for refund..................................... 94
Proper Party to file a claim for Refund or Tax Credit.................. 94
Effect of an existing liability on a pending claim for refund ... 96
Nature of a Tax Credit Certificate ............................................ 96
Refund and Protest are Mutually Exclusive Remedies
97
Is the taxpayer entitled to claim interest on the refunded tax?
97
Remedies Available to the Government .............................................. 97
No Injunction Rule; Exceptions.................................................................. 98
Administrative Remedies ............................................................. 98
i. Action to Contest Forfeiture of Chattel ................................ 98
ii. Redemption............................................................................................ 98
iii. Tax Lien ..................................................................................................... 99
iv. Levy and Distraint.............................................................................. 99
v. Garnishment .......................................................................................... 99
vi. Availment of Tax Amnesty........................................................... 99
Period within which the Government could Collect ................... 99
Judicial Remedies in Detail .......................................................... 99
Civil Penalties....................................................................................................... 100
Surcharges ............................................................................................................. 100
i. Ordinary Surcharge ....................................................................... 100
ii. Fraud Penalty ..................................................................................... 100
Fraud Penalty ..................................................................................... 100
Delinquency Interest and Deficiency Interest .............................. 100
Compromise Penalty .................................................................... 100
Nature and Source of Taxing Power.................................................... 101
Grant of Local Taxing Power under the Local Government
Code101
Extent of the Power of Congress in Local Taxation . 101
Residual Powers ................................................................................................ 101
Fundamental Principles ............................................................................... 102
Common Limitations on the Exercise of the Local Taxing
Power 102
Rule on Pre-Emption (Bar) ........................................................................ 102
Local Tax on Common Carriers ............................................. 102
Exemptions of Coop Registered with CDA...................................... 103
Scope of Taxing Power.................................................................................. 104
Taxes that can be imposed by Provinces ......................................... 104
Taxes that can be imposed by Municipalities .............. 105
Grant of Tax Exemption ............................................................................... 105
Situs of Payment of Local Tax................................................................... 106
Situs ............................................................................................................................ 106
Interest and Surcharge ................................................................ 106
Assessment and Collection of Local Taxes ...................................... 106
Remedies of Local Government Units ................................................ 106
Suspension of Period to Assess and Collect .................. 106
Taxpayer’s Remedies ..................................................................................... 107
Fundamental Principles ............................................................................... 108
Imposition.............................................................................................................. 108
Properties Exempt ........................................................................................... 108
Persons liable for RPT .................................................................. 109
Taxpayer’s Remedies ..................................................................................... 109
Exclusive Appellate Jurisdiction ............................................................. 110
Jurisdiction over cases involving Criminal Offenses110
When and where should these cases be filed? ............................. 110
i. Civil Cases ............................................................................................. 110
ii. Criminal Cases ................................................................................... 111
Jurisdiction of CTA En Banc in the Nullification of
Judgments 111
Prescriptive Period for Criminal Cases .............................................. 111

I. GENERAL PRINCIPLES
CONCEPT AND PURPOSE OF TAXATION
Definition
Taxation is the power by which the sovereign, through its law-making
body, raises revenue to defray the necessary expenses of government. It
is merely a way of apportioning the costs of government among those
who, in some measure, are privileged to enjoy its benefits and must bear
its burdens
In other words, taxation is:
(1) The inherent power of the sovereign exercised through legislature
(2) To impose burdens
(3) Upon subjects and objects
(4) Within its jurisdiction
(5) For the purpose of raising revenues
(6) To carry out the legitimate objects of government
Purpose
Primary Purpose
To raise funds or property to enable the State to promote the general
welfare and protection of the people
Secondary Purpose
(1) Promotion of general welfare - taxation may be used as an
implement of police power to promote the general welfare of the
people.
In the case of Lutz v. Araneta (G.R. No. L7859, December 22, 1955),
the SC upheld the validity of the Sugar Adjustment Act, which
imposed a tax on milled sugar since the purpose of the law was to
strengthen an industry that is so undeniably vital to the economy –
the sugar industry
(2) Regulation of activities/industries - Taxes may also be imposed for a
regulatory purpose as, for instance, in the rehabilitation and
stabilization of a threatened industry which is affected with public
interest, like the oil industry (Caltex Philippines, Inc. v. Commission
on Audit, et al., G.R. No. 92585, May 8, 1992).
(3) Reduction of social inequality – a progressive system of taxation
prevents the undue concentration of wealth in the hands of few
individuals.
• Progressivity is based on the principle that those who are
able to pay more should shoulder the bigger portion of the tax
burden.
(4) Encourage economic growth – the grant of incentives or exemptions
encourage investment thereby stimulating economic activity
(5) Protectionism – Protective tariffs and customs duties are imposed
as taxes in order to protect important sectors of the economy or
local industries, as in the case of foreign importations.
Nature
The nature of the State’s power to tax is two-fold: it is both an inherent
and a legislative power (1996 Bar)
(1) Inherent attribute of sovereignty
It is an essential and inherent attribute of sovereignty, belonging as
a matter of right to every independent government, without being
expressly conferred by the people (Pepsi-Cola v. Mun. of Tanauan,
69 SCRA 460)
Constitution only impose Limitations
It does not need constitutional conferment. Constitutional
provisions do not give rise to the power to tax but merely impose
limitations.
Why is the power to tax considered inherent in a sovereign
State? (2003 Bar)
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
It is considered inherent in a sovereign State because it is a
necessary attribute of sovereignty. Without this power no
sovereign State can exist or endure. The power to tax proceeds
upon the theory that the existence of a government is a necessity
and this power is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent state or
government. No sovereign state can continue to exist without the
means to pay its expenses; and that for those means, it has the right
to compel all citizens and property within its limits to contribute,
hence, the emergence of the power to tax
(2) Legislative in Character
The legislature determines the coverage, object, nature, extent and
situs [CONES] of the tax to be imposed.
GR: Such power is exclusively vested in the legislature
XPN: Constitution provides otherwise (Art. VI, Sec. 28[2], Art. X, Sec.
5, Constitution)
a. Delegation to Local Government Units
b. Delegation to the President (Flexible Tariff Clause).
It is based on the principle that taxes are a grant of the people who
are taxed, and the grant must be made by the immediate
representative of the people, and where the people have laid the
power, there it must remain and be exercised (CIR v. Fortune
Tobacco Corporation, 559 SCRA 160, 2008).
May legislative bodies enact laws to raise revenues in the
absence of constitutional provisions granting said body the
power of tax? Explain. (2005 Bar)
Yes. The constitutional provisions relating to the power of taxation
do not operate as grants of the power of taxation to the
government, but instead merely constitute a limitation upon a
power which would otherwise be practically without limit.
Moreover, it is inherent in nature, being an attribute of sovereignty.
There is, thus, no need for a constitutional grant for the State to
exercise this power.
Characteristics of taxation [CUPS]
(1) Comprehensive - It covers persons, businesses, activities,
professions, rights and privileges.
(2) Unlimited - It is so unlimited in force and searching in extent that
courts scarcely venture to declare that it is subject to any
restrictions, except those that such rests in the discretion of the
authority which exercises it
(3) Plenary - It is complete. Under NIRC, the BIR may avail of certain
remedies to ensure the collection of taxes
(4) Supreme- It is supreme insofar as the selection of the subject of
taxation is concerned, but it does not mean that it is superior to the
other inherent powers of the State.
Can police power and taxation co-exist in one act of the
government?
Yes. Taxation is no longer envisioned as a measure merely to raise
revenue to support the existence of the government. Taxes may be levied
with a regulatory purpose to provide a means for the rehabilitation and
stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state (Caltex Philippines,
Inc. v. Commission on Audit, 208 SCRA 726). Thus, the power of taxation
may be exercised to implement police power (Tiu v. Videogram
Regulatory Board, 151 SCRA 208)
Power of Taxation of a LGU | Directly Conferred; No longer a
delegative power
The power of taxation of a LGU is directly conferred by the Constitution
under Sec. 5, Art. X thereof.
NAPOCOR vs. City of Cabanatuan
GR NO. 149110 April 9, 2003
Tax Exemption of NAPOCOR
NAPOCOR was created to "undertake the development of hydroelectric
generation of power and the production of electricity from nuclear,
geothermal and other sources, as well as the transmission of electric
power on a nationwide basis." Pursuant to this mandate, petitioner
generates power and sells electricity in bulk. Franchise tax is being
assessed by the City of Cabanatuan. However, NAPOCOR alleges that it is
exempt from.
1 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Protection of a
Maintenance
Is NAPOCOR exempt from tax? secured
of healthy FMV of the
organized
economic property taken
No. Taxes are the lifeblood of the government, for without taxes, the society, benefits
Benefits standard of from him.
government can neither exist nor endure. A principal attribute of received from
received society.
sovereignty, the exercise of taxing power derives its source from the very government.
Direct benefit
existence of the state whose social contract with its citizens obliges it to
No direct results
promote public interest and common good. The theory behind the No direct
benefit.
exercise of the power to tax emanates from necessity; without taxes, benefit.
government cannot fulfill its mandate of promoting the general welfare GR: Does not
and wellbeing of the people. impair
contracts
One of the most significant provisions of the LGC is the removal of the XPN: The
blanket exclusion of instrumentalities and agencies of the national Non-
government is
impairment Contracts may be impaired
government from the coverage of local taxation. Although as a general party to
of contracts
rule, LGUs cannot impose taxes, fees or charges of any kind on the contract
National Government, its agencies and instrumentalities, this rule now granting
admits an exception, i.e., when specific provisions of the LGC authorize exemption for a
the LGUs to impose taxes, fees or charges on the aforementioned entities. consideration
Section 151 in relation to section 137 of the LGC clearly authorizes the Must comply
respondent city government to impose on the petitioner the franchise tax Must not be Must be for
with the tests
in question. A franchise tax is "a tax on the privilege of transacting contrary to public purpose
Test of on “lawful
business in the state and exercising corporate franchises granted by the inherent and and with
validity subjects” and
state." constitutional payment of just
“lawful
limitations compensation
means”
Indeed, it is proven that: (1) petitioner has a "franchise" in the sense of a
secondary or special franchise; and (2) it is exercising its rights or Ferrer, Jr. vs. Bautista
privileges under this franchise within the territory of the respondent city G.R. No. 210551, June 30, 2015
government.
Imposition of SHT
Neither is NAPOCOR a GOCC, despite the ownership of the government
of the majority of its stocks. Its activities do not partake of the sovereign Ordinance No. SP-2095 imposes a Socialized Housing Tax equivalent to
functions of the government. They are purely private and commercial 0.5% on the assessed value of land in excess of ₱100,000.00. This special
undertakings, albeit imbued with public interest. The public interest assessment is the same tax referred to in R.A. No. 7279 or the UDHA.96
involved in its activities, however, does not distract from the true nature The SHT is one of the sources of funds for urban development and
of the petitioner as a commercial enterprise, in the same league with housing program.
similar public utilities like telephone and telegraph companies, railroad
companies, water supply and irrigation companies, gas, coal or light Is the imposition of SHT constitutional?
companies, power plants, ice plant among others; all of which are
declared by this Court as ministrant or proprietary functions of Yes. Clearly, the SHT charged by the QC Government is a tax which is
government aimed at advancing the general interest of society. within its power to impose. Aside from the specific authority vested by
Section 43 of the UDHA, cities are allowed to exercise such other powers
Note: The SC had ruled in the case of Ferrer v. Bautista that the power of and discharge such other functions and responsibilities as are necessary,
taxation of LGUs is a delegated power. However, the SC was merely appropriate, or incidental to efficient and effective provision of the basic
narrating the history of the power of taxation of the LGU. Prior to the services and facilities which include, among others, programs and
1987 Constitution, the power of tax of an LGU is a delegated power: an projects for low-cost housing and other mass dwellings. The collections
LGU needs a statutory law in order to exercise the power of taxation. As made accrue to its socialized housing programs and projects
it now stands, a LGU does not need any statutory law to exercise the
power of taxation because it is directly conferred by the Constitution. The tax is not a pure exercise of taxing power or merely to raise revenue;
it is levied with a regulatory purpose. The levy is primarily in the exercise
DISTINGUISH: POWER OF of the police power for the general welfare of the entire city. It is greatly
imbued with public interest. Removing slum areas in QC is not only
TAXATION, POLICE POWER, AND beneficial to the underprivileged and homeless constituents but
EMINENT DOMAIN advantageous to the real property owners as well. The situation will
improve the value of their property investments, fully enjoying the same
in view of an orderly, secure, and safe community, and will enhance the
POLICE EMINENT quality of life of the poor, making them law-abiding constituents and
TAXATION
POWER DOMAIN better consumers of business products.
Authority Government or
Government or Government
who public service Is the imposition of SHT violative of equal protection clause
its political or its political
exercises the companies and between real property owners and informal settlers?
power subdivision subdivision
public utilities
To raise To facilitate the No. There is a valid distinction between real property owners and
revenue. Promotion of taking of informal settlers. An ordinance based on reasonable classification does
Purpose Regulation is general private not violate the constitutional guaranty of the equal protection of the law.
merely welfare property for The requirements for a valid and reasonable classification are: (1) it must
incidental public purpose rest on substantial distinctions; (2) it must be germane to the purpose of
On an the law; (3) it must not be limited to existing conditions only; and (4) it
individual as must apply equally to all members of the same class. For the purpose of
Persons Upon the community or class of
the owner of a undertaking a comprehensive and continuing urban development and
affected individuals
particular housing program, the disparities between a real property owner and an
property informal settler as two distinct classes are too obvious and need not be
Limited to the discussed at length. The differentiation conforms to the practical dictates
cost of No imposition, of justice and equity and is not discriminatory within the meaning of the
Amount of No ceiling
regulation, the owner is Constitution. Notably, the public purpose of a tax may legally exist even if
monetary except inherent
imposition
issuance of paid the FMV of the motive which impelled the legislature to impose the tax was to favor
limitations
license or his property one over another. It is inherent in the power to tax that a State is free to
surveillance select the subjects of taxation. Inequities which result from a singling out

2 | KAMM Notes

of one particular class for taxation or exemption infringe no
constitutional limitation.
Imposition of Garbage Fee
Petitioner contends that the imposition of garbage fee is tantamount to
double taxation because garbage collection is a basic and essential public
service that should be paid out from property tax, business tax, transfer
tax, amusement tax, community tax certificate, other taxes, and the IRA of
the QC Government.
Will the imposition of garbage fee amount to double taxation?
No. The fee imposed for garbage collections under Ordinance No. S₱2235
is a charge fixed for the regulation of an activity. Assessments for garbage
collection services have been consistently treated as a fee and not a tax.
The garbage fee is not a tax. As distinguished, if the generating of revenue
is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that
incidentally revenue is also obtained does not make the imposition a tax."
Does it violate the equal protection clause?
Yes. It violates the equal protection clause and the provisions of the LGC
that an ordinance must be equitable and based as far as practicable on
the taxpayer’s ability to pay, and not unjust, excessive, oppressive,
confiscatory. In the subject ordinance, the rates of the imposable fee
depend on land or floor area and whether the payee is an occupant of a
lot, condominium, social housing project or apartment.
For the purpose of garbage collection, there is, in fact, no substantial
distinction between an occupant of a lot, on one hand, and an occupant of
a unit in a condominium, socialized housing project or apartment, on the
other hand. Most likely, garbage output produced by these types of
occupants is uniform and does not vary to a large degree; thus, a similar
schedule of fee is both just and equitable
Smart vs. Municipality of Malvar, Batangas
GR No. 204429 February 18, 2014
Smart constructed a telecommunications tower within the territorial
jurisdiction of the Municipality. The construction of the tower was for the
purpose of receiving and transmitting cellular communications within
the covered area. The Respondent Municipality passed Ordinance No. 18,
series of 2003, entitled "An Ordinance Regulating the Establishment of
Special Projects." Thereafter, SMART received from the Permit and
Licensing Division of the Office of the Mayor of the Municipality an
assessment letter with a schedule of payment for the total amount of
₱389,950.00 for Smart’s telecommunications tower.
Is the assessment on SMART’s telecommunication tower a tax or a
fee?
It is a fee. The purpose and effect of the imposition determine whether it
is a tax or a fee, and that the lack of any standards for such imposition
gives the presumption that the same is a tax.
The designation given by the municipal authorities does not decide
whether the imposition is properly a license tax or a license fee. The
determining factors are the purpose and effect of the imposition as may
be apparent from the provisions of the ordinance.
As clearly stated in its whereas clauses, the primary purpose of Ordinance
No. 18 is to regulate the "placing, stringing, attaching, installing, repair
and construction of all gas mains, electric, telegraph and telephone wires,
conduits, meters and other apparatus" listed therein, which included
Smart’s telecommunications tower. Clearly, the purpose of the assailed
Ordinance is to regulate the enumerated activities particularly related to
the construction and maintenance of various structures.
Since the main purpose of Ordinance No. 18 is to regulate certain
construction activities of the identified special projects, which included
"cell sites" or telecommunications towers, the fees imposed in Ordinance
No. 18 are primarily regulatory in nature, and not primarily revenue-
raising. While the fees may contribute to the revenues of the Municipality,
this effect is merely incidental. Thus, the fees imposed in Ordinance No.
18 are not taxes.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Drugstore Association of the Philippines vs. National Council on Disability
Affairs
GR No. 194561 September 14, 2016
Is the 20% discount given to PWD a valid implement of police
power?
Yes. To implement the above policies, R.A. No. 9442 which amended R.A.
No. 7277 grants incentives and benefits including a 20% discount to
PWDs in the purchase of medicines, fares, amusement and restaurants.
The PWD mandatory discount on the purchase of medicine is supported
by a valid objective or purpose as aforementioned. It has a valid subject
considering that the concept of public use is no longer confined to the
traditional notion of use by the public, but held synonymous with public
interest, public benefit, public welfare, and public convenience. As in the
case of senior citizens, the discount privilege to which the PWDs are
entitled is actually a benefit enjoyed by the general public to which these
citizens belong
CIR vs. Central Luzon Drug Corporation
April 1, 2015
Is the 20% discount given to Senior Citizens considered as taking
without just compensation?
No. The concept of public use is no longer confined to the traditional
notion of use by the public, but held synonymous with public interest,
public benefit, public welfare, and public convenience. The discount
privilege to which our senior citizens are entitled is actually a benefit
enjoyed by the general public to which these citizens belong
As a result of the 20% discount imposed by RA 7432, respondent
becomes entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release.
Moreover, the grant of the senior citizen discount is not eminent domain, it
is taxation. Just compensation is not even necessary.
Tax credit vs. Tax deduction
Tax credit generally refers to an amount that is subtracted directly from
one’s total tax liability. It is an allowance against the tax itself or a
deduction from what is owed by a TP to the government. Examples of tax
credits are withheld taxes, payments of estimated tax, and investment tax
credits.
A tax credit differs from a tax deduction. On the one hand, a tax credit
reduces the tax due, including -- whenever applicable --the income tax
that is determined after applying the corresponding tax rates to taxable
income. A tax deduction, on the other, reduces the income that is subject
to tax in order to arrive at taxable income. To think of the former as the
latter is to avoid, if not entirely confuse, the issue. A tax credit is used only
after the tax has been computed; a tax deduction, before.
THEORY AND BASIS OF TAXATION
Lifeblood Theory
Lifeblood Theory
The government chiefly relies on taxation to obtain the means to carry on
its operations. Taxes are essential to its very existence. (CIR v. Solidbank
Corporation, G.R. No. 148191, November 25, 2003)
Power to destroy vis-à-vis Power to build
Justice Marshall: ‘‘The power to tax involves the power to destroy.
Justice Holmes: ‘‘The power to tax is not the power to destroy as long as
this court sits.’’
Harmonization: Justice Marshall refers to valid tax which is being used as
an implement of police power. On the other hand, Justice Holmes refers
to an invalid tax: a tax which has no legal basis.
Philhealth v. CIR
G.R. No. 167330 September 18, 2009
Petitioner claims that the assessed DST to date which amounts to ₱376
million is way beyond its net worth of ₱259 million. Respondent never
disputed these assertions.
3 | KAMM Notes

Can the government impose such amount of tax to the detriment of
petitioner’s existence?
No. As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who is to pay it. So
potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy."
Legitimate enterprises enjoy the constitutional protection not to be taxed
out of existence. Incurring losses because of a tax imposition may be an
acceptable consequence but killing the business of an entity is another
matter and should not be allowed. It is counter-productive and ultimately
subversive of the nation’s thrust towards a better economy which will
ultimately benefit the majority of our people.
Necessity theory
Necessity Theory
Without taxes, the government cannot fulfill its mandate of promoting
the general welfare and wellbeing of the people. It is a necessary burden
to preserve the State’s sovereignty and a means to give the citizenry an
army to resist aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvements for the enjoyment
of the citizenry, and those which come within the State’s territory and
facilities and protection which a government is supposed to provide.
Benefits-Protection Theory
(Doctrine of Symbiotic-Relationship)
Benefits-Protection Theory (Doctrine of Symbiotic-Relationship)
It involves the power of the State to demand and receive taxes based on
the reciprocal duties of support and protection between the State and its
citizens.
Despite the natural reluctance to surrender part of one’s earned income
to the taxing authorities, every person who is able must contribute his
share in the running of the government. The government, for its part, is
expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their material
and moral values” (CIR v. Algue, G.R. No. L-28896, February 17, 1988).
JURISDICTION OVER SUBJECTS AND
OBJECTS
Jurisdiction over subjects and objects
It is the country, state or sovereign that gives protection and has the right
to demand payment of taxes with which to finance activities so it could
continue to give protection. Taxation is territorial because it is only
within the confines of its territory that a country, state or sovereign may
give protection
PRINCIPLES OF A SOUND TAX
SYSTEM
Non-observance of the following Canon
GR: Will not render a tax imposition invalid. They are merely guidelines
or directives in the imposition of tax laws
XPN: To the extent that specific constitutional or statutory limitations are
grossly impaired.
• Thus, even if the imposition of VAT on tollway operations may
seem burdensome to implement, it is not necessarily invalid unless
some aspect of it is shown to violate any law or the Constitution.
(Diaz v. Sec. of Public Works, 193007)
Gross Violation of the Principles of “Theoretical Justice” | Due
Process
Will result to the nullification of the law, i.e., when the government is
already collecting an exorbitant amount of tax that is not commensurate
to the TP’s ability to pay.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
However, it will not be invalidated on the ground that it violates the
principle of theoretical justice but on the premise that it violates the due
process clause, the tax being oppressive.
Fiscal adequacy
Revenue raised must be sufficient to meet government/public
expenditures and other public needs (Chavez v. Ongpin, G.R. No. 76778,
June 6, 1990).
Administrative feasibility
The tax system should be capable of being effectively administered and
enforced with the least inconvenience to the TP (Diaz v. SOF, G.R. No.
193007, July 19, 2011)
True or False. A law that allows taxes to be paid either in cash or in
kind is valid.
True. There is no law which requires payment of taxes in cash only.
However, a law allowing payment of taxes in kind, although valid, may
pose problems of valuation, hence, will violate the principle of
administrative feasibility
Kapatiran ng Mga Naglilingkod sa Pamahalaan v. Tan
G.R. No. 81311, June 30, 1988
Is the VAT law violative of the administrative feasibility principle?
No. The VAT law is principally aimed to rationalize the system of taxes on
goods and services. Thus, simplifying tax administration and making the
system more equitable to enable the country to attain economic recovery
Diaz v. SOF, 654 SCRA 96
G.R. No. 193007, July 19, 2011
Is the imposition of VAT on tollway operations valid?
Yes. Administrative feasibility is one of the canons of a sound tax system.
Non-observance of the canon, however, will not render a tax imposition
invalid “except to the extent that specific constitutional or statutory
limitations are impaired.”
Thus, even if the imposition of VAT on tollway operations may seem
burdensome to implement, it is not necessarily invalid unless some
aspect of it is shown to violate any law or the Constitution.
Theoretical Justice
(1) Must take into consideration the TP’s ability to pay (Ability to Pay
Theory).
(2) Art. VI, Sec. 28(1), 1987 Constitution mandates that the rule on
taxation must be uniform and equitable and that the State must
evolve a progressive system of taxation.
A violation of the principle of a sound tax system may or may not
invalidate a tax law | Due Process
GR: A tax law will retain its validity even if it is not in consonance with the
principles of fiscal adequacy and administrative feasibility because the
Constitution does not expressly require so. These principles are only
designated to make our tax system sound.
XPN: However, if a tax law runs contrary to the Principle of Theoretical
Justice, such violation will render the law unconstitutional considering
that under the Constitution, the rule of taxation should be uniform and
equitable
INHERENT AND CONSTITUTIONAL
LIMITATIONS ON TAXATION
Inherent Limitations
Inherent limitations (PILTE)
(1) Public Purpose
(2) Inherently Legislative
(3) Territorial
(4) International Comity
(5) Exemption of Government Entities, Agencies and Instrumentalities
(1) Public Purpose
4 | KAMM Notes

It does not only pertain to those purposes which are traditionally
viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes
designed to promote social justice.
It is the purpose which determines the public character of the tax
law, not the number of persons benefited. As long as the ultimate
result favors the welfare of the public in general, the appropriation
of a public revenue is deemed done for a public purpose.
Suppose:
The government appropriated ₱1 billion in order to extend an
interest-bearing loan to X Corporation, a domestic private
corporation.
Is the law constitutional?
No. If a particular government fund shall be appropriated only for
the sole purpose of extending financial assistance to a private
corporation, it shall not be considered as a public purpose. The
appropriation of the government funds must have a direct benefit
to the public.
(2) Inherently Legislative
To the Congress belongs the exclusive prerogative to determine the
coverage, object, nature, extent and situs of taxation (CONES).
Permissible Delegation
In every case of permissible delegation, there must be a showing
that the delegation itself is valid. It is valid only if the law
(a) is complete in itself, setting forth therein the policy to be
executed, carried out, or implemented by the delegate
(Completeness Test); and
(b) fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must
conform in the performance of his functions (Sufficient
Standard Test).
A sufficient standard is one which defines legislative policy, marks
its limits, maps out its boundaries and specifies the public agency to
apply it. It indicates the circumstances under which the legislative
command is to be effected. Both tests are intended to prevent a total
transference of legislative authority to the delegate, who is not
allowed to step into the shoes of the legislature and exercise a
power essentially legislative.
(3) Territoriality
Since laws cease to operate beyond a country’s jurisdictional limits,
the taxing power of a country is likewise limited to person and
property within and subject to its jurisdiction. This same rule
applies to the taxing power of a territory.
See Situs of Taxation
(4) International Comity
The PH adopts the GAPOIL as part of the law of the land and
adheres to the policy of peace, equality, justice, freedom,
cooperation and amity with all nations.
Can the PH government impose property taxes upon the
embassies?
No. By legal fiction, these embassies are located outside the
territory of the PH, as such, the PH government cannot impose
property tax for properties not within its territorial jurisdiction. In
addition, the PH government cannot impose tax in a co-equal state
Suppose:
Manny Pacquiao, a resident citizen, obtained prizes for winning his
boxing bout in Las Vegas.
Can the PH government impose taxes on the winnings of
Manny Pacquiao for his boxing bout in Las Vegas?
Yes. Under the NIRC, a resident citizen shall be subjected to tax for
income earned within and outside the PH.
Can the PH Government impose withholding tax on the
winning of Manny Pacquiao in Las Vegas?
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
No. The PH Government cannot constitute Top Rank as a
withholding agent because it will violate the principles of
International Comity and Territoriality. In such a case, it would
violate due process clause.
Suppose:
Fevy is an OFW, a non-resident citizen, Fevy earned compensation
income abroad.
May the PH government impose a tax on the income of Fevy
earned abroad?
Yes, under the citizenship principle.
Can the Philippine government impose a tax on the income of
Eros?
No. A non-resident citizen can only be subject to tax for income
sourced from within. A compensation income is an income from
services. The situs is where the service has been earned.
In this case, the government cannot subject the income to tax
because the situs thereof is abroad, hence not an income sourced
from within. As such, it cannot be subject to tax.
(5) Exemption of Government Entities, Agencies and
Instrumentalities
Properties of the national government as well as those of the LGUs
are not subject to tax, otherwise, it will result in the absurd situation
of the government ‘taking money from one pocket and putting it in
another.’
Exemption of Instrumentalities
Inherent limitation applies only to the State. The congress can pass
a law imposing tax upon governmental instrumentalities.
However, the present rule is that the exemption of the government
likewise extends to instrumentalities
Exemption of GOCCs
GR: Not exempt from tax
XPN: If the charter of the GOCC provides for tax exemptions
• Check if the problem indicates that the charter provides for
tax exemption. If it does, then it is exempt from tax.
Section 193, RA 7160 | Blanket Withdrawal Clause
Withdrawal of Tax Exemption Privileges.
GR: Tax exemptions or incentives granted to, or presently enjoyed
by all persons, whether natural or juridical, including GOCC are
hereby withdrawn upon the effectivity of this Code
XPN:
a. Local Water Districts
b. Cooperatives duly registered under R.A. No. 6938 or CDA
c. NSNP Hospitals
d. NSNP Educational Institutions
Is the enactment of the blanket withdrawal clause a violation
of the non-impairment clause?
No. Because the non-impairment clause applies to contractual tax
exemptions. It does not apply to tax exemptions granted by the
state in the exercise of its sovereign function (franchise
exemptions).
Test in determining an instrumentality or GOCC
The entity is considered as an instrumentality if it is:
(1) neither a stock nor non-stock corporation and
(2) performs a governmental function
MIAA vs. Paranaque
GR No. 155650 July 20, 2006
Are the Airport Lands and Buildings of MIAA exempt from real
estate tax imposed by local governments?
Yes. First, MIAA is not a GOCC but an instrumentality of the National
Government and thus exempt from local taxation. Second, the real
properties of MIAA are owned by the Republic of the Philippines and thus
exempt from real estate tax.
5 | KAMM Notes

There is no dispute that a GOCC is not exempt from real estate tax.
However, MIAA is not a GOCC. A GOCC must be "organized as a stock or
non-stock corporation." MIAA is not organized as a stock or non-stock
corporation. MIAA is not a stock corporation because it has no capital
stock divided into shares. MIAA has no stockholders or voting shares.
MIAA is also not a non-stock corporation because it has no members.
Section 88 of the Corporation Code provides that non-stock corporations
are "organized for charitable, religious, educational, professional,
cultural, recreational, fraternal, literary, scientific, social, civil service, or
similar purposes, like trade, industry, agriculture and like chambers."
MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use.
MIAA is a government instrumentality vested with corporate powers
to perform efficiently its governmental functions. MIAA is like any other
government instrumentality, the only difference is that MIAA is vested
with corporate powers.
SEC. 133. Common Limitations on the Taxing Powers of LGU – Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.
Sec 234. Exemption from RPT
GR: Real properties owned by the government is not subject to tax
XPN: Beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.
Limited only to those ADE
Here, portions of the Airport Lands and Buildings that MIAA leases to
private entities are not exempt from real estate tax. For example, the land
area occupied by hangars that MIAA leases to private corporations is
subject to real estate tax. In such a case, MIAA has granted the beneficial
use of such land area for a consideration to a taxable person and therefore
such land area is subject to real estate tax.
Constitutional Limitations
Due Process
There must be a tax law before the imposition and collection of the tax.
Otherwise, the imposition or collection shall by violative of the due
process clause.
Violations of Due Process
(1) If the tax amounts to confiscation of property
(2) The subject of confiscation is outside the jurisdiction of the taxing
authority
(3) If the law imposed for a purpose other than a public purpose
(4) The law which is applied retroactively imposes unjust and
oppressive taxes
(5) Where the law is in violation of the inherent limitations
CREBA v. Romulo
09 March 2010
Petitioner assails the validity of the imposition of minimum corporate
income tax (MCIT) on corporations. Section 27(E) of RA 8424 provides
for MCIT on domestic corporations and is implemented by RR 9-98.
Petitioner argues that the MCIT violates the due process clause because
it levies income tax even if there is no realized gain.
Is the imposition of MCIT violative of the due process clause?
No. Under the MCIT scheme, a corporation, beginning on its fourth year
of operation, is assessed an MCIT of 2% of its gross income when such
MCIT is greater than the NCIT imposed under Section 27(A). If the NCIT
is higher than the MCIT, the corporation does not pay the MCIT. Any
excess of the MCIT over the normal tax shall be carried forward and
credited against the NCIT for the three immediately succeeding taxable
years. The MCIT on domestic corporations is a new concept introduced
by RA 8424 to the PH taxation system. It came about as a result of the
perceived inadequacy of the self-assessment system in capturing the true
income of corporations. It was devised as a relatively simple and effective
revenue-raising instrument compared to the normal income tax which is
more difficult to control and enforce. It is a means to ensure that everyone
will make some minimum contribution to the support of the public
sector.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes
resorted to by corporations are allowed in our jurisdiction. The MCIT
serves to put a cap on such tax shelters. As a tax on gross income, it
prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other
stratagems. Since the tax base was broader, the tax rate was lowered.
The MCIT is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of goods
and other direct expenses from gross sales. Clearly, the capital is not being
taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed
in lieu of the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net
income tax due from a corporation, pegging the rate at a very much
reduced 2% and uses as the base the corporation’s gross income
See Double Taxation
Equal Protection Clause
Elements
(1) Must be based on substantial distinction
(2) Must be germane for the purposes of the law
(3) Must not apply to existing conditions only
(4) Must apply to all members of the same class.
Note: The act of singling out a particular group is not automatically
considered as violation of the equal protection clause. However, if the
singling out is not germane to the purposes of the law, it will be violative
of the equal protection clause.
Commissioner of Customs vs. Hypermix Feeds
GR No. 179579, Feb. 1, 2012
Commissioner of Customs issued a Memorandum where, for tariff
purposes, wheat was classified according to the following: (1) importer
or consignee; (2) country of origin; and (3) port of discharge. The
regulation provided an exclusive list of corporations, ports of discharge,
commodity descriptions and countries of origin. Depending on these
factors, wheat would be classified either as food grade or feed grade. The
corresponding tariff for food grade wheat was 3%, for feed grade, 7%.
Respondent claimed that the equal protection clause was violated when
the regulation treated non-flour millers differently from flour millers for
no reason
Was there violation?
Yes. Generally, the guarantee of the equal protection of laws is not
violated if there is a reasonable classification. However, in this case, on
the one hand, even if other millers excluded from CMO 27-2003 have
imported food grade wheat, the product would still be declared as feed
grade wheat, a classification subjecting them to 7% tariff. On the other
hand, even if the importers listed under CMO 27-2003 have imported
feed grade wheat, they would only be made to pay 3% tariff, thus
depriving the state of the taxes due. The regulation, therefore, does not
become disadvantageous to respondent only, but even to the state.
It is also not clear how the regulation intends to monitor more closely
wheat importations and thus prevent their misclassification. A careful
study of CMO 27-2003 shows that it not only fails to achieve this end, but
results in the opposite. The application of the regulation forecloses the
possibility that other corporations that are excluded from the list import
food grade wheat; at the same time, it creates an assumption that those
who meet the criteria do not import feed grade wheat. In the first case,
importers are unnecessarily burdened to prove the classification of their
wheat imports; while in the second, the state carries that burden.
ABAKADA Guro v. Purisima
2008
Rational Basis Test: The equal protection of the laws clause of the
Constitution allows classification. Classification in law, as in the other
6 | KAMM Notes

departments of knowledge or practice, is the grouping of things in
speculation or practice because they agree with one another in certain
particulars. A law is not invalid because of simple inequality. The very
idea of classification is that of inequality, so that it goes without saying
that the mere fact of inequality in no manner determines the matter of
constitutionality. All that is required of a valid classification is that it be
reasonable, which means that the classification should be based on
substantial distinctions which make for real differences, that it must be
germane to the purpose of the law; that it must not be limited to existing
conditions only; and that it must apply equally to each member of the
class. This Court has held that the standard is satisfied if the classification
or distinction is based on a reasonable foundation or rational basis and is
not palpably arbitrary.
In the exercise of its power to make classifications for the purpose of
enacting laws over matters within its jurisdiction, the state is recognized
as enjoying a wide range of discretion. It is not necessary that the
classification be based on scientific or marked differences of things or in
their relation. Neither is it necessary that the classification be made with
mathematical nicety. Hence, legislative classification may in many cases
properly rest on narrow distinctions, for the equal protection guaranty
does not preclude the legislature from recognizing degrees of evil or
harm, and legislation is addressed to evils as they may appear.
Freedom of Religion
Two Aspects
(1) Free Exercise Clause – ‘‘The free exercise and enjoyment of
religious profession and worship, without discrimination or
preference, shall forever be allowed.”
Prior Restraint
Always think if there is prior restraint. If there is, then there is
violation of the freedom of religion particularly on the free exercise
clause.
American Bible Society v. City of Manila
G.R. No. L-9637 April 30, 1957
A municipal license tax (license fee) on the sale of bibles and
religious articles by a non-stock, non-profit missionary
organization at minimal profits constitutes a curtailment of
religious freedom and worship which is guaranteed by the
Constitution.
However, the income of such organizations from any activity
conducted for profit or from any of their property, real or personal,
regardless of the disposition made of such income is taxable.
Suppose:
A law was passed imposing taxes on the donations received by the
Roman Catholic church.
Is the law constitutional?
No. While there is no violation of the free exercise clause because
there is no prior restraint. There is violation of equal protection
clause because there is no substantial distinction between the
Roman Catholic Church with all other religious groups.
(2) Non-Establishment Clause – ‘‘No law shall be made respecting an
establishment of religion, or prohibiting the free exercise thereof.
Undue Preference
The state cannot give undue preference to a particular religion.
Accommodation
The conduct of mass during break periods is not considered a
violation of the non-establishment clause because there is merely
an accommodation. Further, no public funds are being
appropriated for the conduct of mass.
Re: Letter of Tony Valenciano, Holding of Religious rituals at the Hall
of Justice Building in Quezon City
March 7, 2017, A.M. No. 10-4-19-SC
Is the holding of masses violative of the non-establishment
clause?
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
The holding of Catholic masses at the basement of the QC Hall of
Justice is not a case of establishment, but merely accommodation.
First, there is no law, ordinance or circular issued by any duly
constitutive authorities expressly mandating that judiciary
employees attend the Catholic masses at the basement. Second,
when judiciary employees attend the masses to profess their faith,
it is at their own initiative as they are there on their own free will
and volition, without any coercion from the judges or
administrative officers. Third, no government funds are being
spent because the lightings and air-conditioning continue to be
operational even if there are no religious rituals there. Fourth, the
basement has neither been converted into a Roman Catholic chapel
nor has it been permanently appropriated for the exclusive use of
its faithful. Fifth, the allowance of the masses has not prejudiced
other religions.
Is public money/property being used thereof?
No. Section 29 (2), Article VI of the 1987 Constitution provides, "No
public money or property shall be appropriated, applied, paid, or
employed, directly or indirectly, for the use, benefit, or support of
any sect, church, denomination, sectarian institution, or system of
religion, or of any priest, preacher, minister, or other religious
teacher, or dignitary as such, except when such priest, preacher,
minister, or dignitary is assigned to the armed forces, or to any
penal institution, or government orphanage or leprosarium."
The aforecited constitutional provision "does not inhibit the use of
public property for religious purposes when the religious character
of such use is merely incidental to a temporary use which is
available indiscriminately to the public in general." Hence, a public
street may be used for a religious procession even as it is available
for a civic parade, in the same way that a public plaza is not barred
to a religious rally if it may also be used for a political assemblage.
Here, the basement of the QC Hall of Justice is not appropriated,
applied or employed for the sole purpose of supporting the Roman
Catholics.
Non-Impairment Clause
Revocability of Tax Exemption
GR: If the grant of an exemption does not constitute a contract (i.e.,
Legislative Franchises), but is merely a ‘‘spontaneous concession by the
legislature, not connected with any service or duty imposed’’ it is
revocable by the power which made the grant
XPN: If the tax exemption constitutes a binding contract and for valuable
consideration, the government cannot unilaterally invoke the tax
exemption
Proprietary Function
The tax exemption must be contained in a contract entered into by the
government in its proprietary function. If the tax exemption did not arise
from a contract entered into by the government in its propriety function,
there is no violation of the non-impairment clause
• NTC Case – contracts can be impaired
Legislative Franchise
Revocation of the franchise wherein a tax exemption is given is not in the
nature of a contractual tax exemption. Further, legislative franchises can
be subject to amendment, alteration, or repeal by Congress.
Give an example of contractual tax exemptions where the non-
impairment clause applies?
Bonds issued by the government when the bond indicates that the
interest income is exempt from tax. The congress cannot later on revoke
the tax exemption because it is in the nature of a contract which is
protected by the non-impairment clause
Quezon City vs. Bayantel
GR No. 162015 March 6, 2006
Quezon City enacted a City Ordinance imposing a real property tax and,
reiterating the withdrawal of exemption from real property tax under
Section 234 of the LGC. Conformably with the City’s Revenue Code, new
tax declarations for Bayantel’s real properties in Quezon City were issued
by the City Assessor.
Is Bayantel subject to RPT?
7 | KAMM Notes

No. Admittedly, RA 7633 was enacted subsequent to the LGC. Perfectly
aware that the LGC has already withdrawn Bayantel’s former exemption
from realty taxes, Congress opted to pass RA 7633 using, under Section
11 thereof, exactly the same defining phrase exclusive of this franchise
which was the basis for Bayantel’s exemption from realty taxes prior to
the LGC. In plain language, Section 11 of Rep. Act No. 7633 states that the
grantee, its successors or assigns shall be liable to pay the same taxes on
their real estate, buildings and personal property, exclusive of this
franchise, as other persons or corporations are now or hereafter may be
required by law to pay.
The Court views this subsequent piece of legislation as an express and
real intention on the part of Congress to once again remove from the
LGCs delegated taxing power, all of the franchisees (Bayantel) properties
that are ADE used in the pursuit of its franchise
Quezon City vs. ABS-CBN
October 6, 2008
The QC Revenue Code of 1993, imposes franchise tax on businesses
operating within its jurisdiction. ABS-CBN was granted the franchise to
install and operate radio and television broadcasting stations in the
Philippines under R.A. No. 7966. It also provides the tax liabilities of ABS-
CBN which reads:
xxx shall pay a franchise tax equivalent to 3% of all gross receipts of the radio/TV
business transacted under this franchise by the grantee, its successors or assigns, and
the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof
xxx
ABS-CBN had been paying local franchise tax imposed by QC. However,
in view of the above provision that it "shall pay a franchise tax xxx in lieu
of all taxes," the corporation developed the opinion that it is not liable to
pay the local franchise tax imposed by QC. Consequently, ABSCBN paid
under protest the local franchise tax imposed by QC
Is ABS-CBN liable for the local franchise tax?
Yes. Congress has the inherent power to tax, which includes the power to
grant tax exemptions. On the other hand, the power of QC to tax is
prescribed by Section 151 in relation to Section 137 of the LGC which
expressly provides that notwithstanding any exemption granted by
any law or other special law, the City may impose a franchise tax.
The "in lieu of all taxes" provision in the franchise of ABSCBN does not
expressly provide what kind of taxes ABS-CBN is exempted from. It is not
clear whether the exemption would include both local, whether
municipal, city or provincial, and national tax. What is clear is that ABS-
CBN shall be liable to pay 3% franchise tax and income taxes under the
NIRC. But whether the "in lieu of all taxes provision" would include
exemption from local tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise tax
must be clearly established and cannot be made out of inference or
implications but must be laid beyond reasonable doubt. Verily, the
uncertainty in the "in lieu of all taxes" provision should be construed
against ABS-CBN. ABS-CBN has the burden to prove that it is in fact
covered by the exemption so claimed. ABS-CBN miserably failed in this
regard.
Traditionally Exempt Taxpayers
Art. VI, SEC. 28(3) Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.
Note: This provision deals with ownership and usage exemption
Ownership Exemption: Charitable institutions, churches and
parsonages or convents appurtenant thereto, mosques, nonprofit
cemeteries.
Usage Exemption: ADE used for religious, charitable, or educational.
[The manner on how the real property was used. Refers to real property
tax only.]
Elements
(1) Must involve real property. [Lands, buildings, improvements]; and
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
(2) The real property must be ADE used for religious, charitable and
educational purpose.
Suppose:
A religious institution leased the real property to a private entity.
Is the property exempt from tax?
No. The RP was not ADE used for religious charitable and educational
purpose.
Angeles University Case
LGU collected building permit fees from Angeles University. AU argued
that it is in the nature of a real property tax since it is being imposed on
the building
Is the collection in the nature of a tax or a fee?
Building permit fee is in the nature of a fee and not a tax because AU must
still comply with documentary requirements. Sec. 28 does not apply
Fee v. Tax
Determine the primary purpose for the exaction. If the primary purpose
is to raise revenue, then it is a tax even if it called a fee. If the exaction is
for the purposes of regulation, then it is a fee.
If the collection of the exaction is coupled with the submission of certain
documents for compliance, then it is a license fee. Otherwise, it is
considered for purposes of raising revenue, thus considered a tax.
Lung Center vs. QC
June 29, 2004
Lung Center of the Philippines is a NSNP. It is the registered owner of a
parcel of land located at Quezon Avenue corner Elliptical Road, Central
District, Quezon City. Erected in the middle of the aforesaid lot is a
hospital known as the Lung Center of the Philippines. A big space at the
ground floor is being leased to private parties, for canteen and small store
spaces, and to medical or professional practitioners who use the same as
their private clinics for their patients whom they charge for their
professional services. Almost one-half of the entire area on the left side of
the building along Quezon Avenue is vacant and idle, while a big portion
on the right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known as
the Elliptical Orchids and Garden Center.
Is Lung Center a charitable institution within the ambit of Section
28(3), Art. VI of the Constitution?
Yes. The test whether an enterprise is charitable or not is whether it
exists to carry out a purpose reorganized in law as charitable or whether
it is maintained for gain, profit, or private advantage.
Under P.D. No. 1823, the petitioner is a NSNP corporation which, subject
to the provisions of the decree, is to be administered by the Office of the
President with the Ministry of Health and the Ministry of Human
Settlements. It was organized for the welfare and benefit of the Filipino
people principally to help combat the high incidence of lung and
pulmonary diseases in the PH.
Does it lose its character as a charitable institution by accepting
paying clients?
No. As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it derives
income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as the money
received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the
persons managing or operating the institution.
Are the portions of its real property that are leased to private
entities exempt from RPT?
No, as these are not actually, directly and exclusively used for charitable
purposes. The portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt
from such taxes. On the other hand, the portions of the land occupied by
8 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

the hospital and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from RPT
CIR vs. St. Luke’s Medical Center, Inc.
September 26, 2012
St. Luke's Medical Center, Inc. (St. Luke's) is organized as a NSNP hospital.
It was assessed by BIR for income tax. However, St. Lukes argued that it
is a NSNP charitable institutions and a civic organization promoting
social welfare. On the other hand, BIR claimed that St. Luke's was actually
operating for profit in 1998 because only 13% of its revenues came from
charitable purposes. Moreover, the hospital's board, officers and EEs
directly benefit from its profits and assets.
In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to
paying patients. It cannot be disputed that a hospital which receives
approximately ₱1.73 billion from paying patients is not an institution
"operated exclusively" for charitable purposes. Clearly, revenues from
paying patients are income received from “activities conducted for
profit.”
Non-Stock, Non-Profit Education Institutions
Art. XIV, Section 4(3). All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in the manner provided by
law.

How does Section 30 of the NIRC define charitable?

Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person.
Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions subject to the limitations provided by law
including restrictions on dividends and provisions for reinvestment.
Art. XIV, Section 4(4). Subject to the conditions prescribed by law, all grants,
endowments, Donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax

The operations of the charitable institution generally refer to its regular
activities. Section 30(E) of the NIRC requires that these operations be
exclusive to charity. There is also a specific requirement that "no part of
[the] net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person." The use of lands,
buildings and improvements of the institution is but a part of its
operations.
Coverage
Applies only to NSNP educational institution. It does not apply to
proprietary educational institution.
Proprietary Educational Institution
A proprietary educational institution’s exemption from RPT is hinged on
Sec. 28(3), Art. VI., not Art. XIV, Sec. 4(3).

Is St. Luke’s exempt? Exemption Proprietary Educ. NSNP Educ.

Institution Institution
No. There is no dispute that St. Luke's is organized as a NSNP charitable Revenue Not Exempt Sec. 4(3), Art. XIV
institution. However, this does not automatically exempt St. Luke's from Assets Sec. 28(3), Art. VI Sec. 4(3), Art. XIV
paying taxes.
What is an educational institution?
To be exempt from real property tax, Section 28(3), Article VI of the The term educational institution, when used in laws granting tax
Constitution requires that a charitable institution use the property exemptions, refers to the school system; it includes a college or an
"actually, directly and exclusively" for charitable purposes. To be exempt educational establishment; it refers to the hierarchically structured and
from income taxes, Section 30(E) of the NIRC requires that a charitable chronologically graded leanings organized and provided by the formal
institution must be "organized and operated exclusively" for charitable school system.
purposes. Likewise, to be exempt from income taxes, Section 30(G) of the
NIRC requires that the institution be "operated exclusively" for social Requisites | Art. XIV, Sec. 4(3)
welfare. (1) The TP falls under the classification NSNP EI; and
(2) The income it seeks to be exempted from taxation is used ADE for
However, the last paragraph of Section 30 of the NIRC qualifies the words educational purposes.
"organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income SEC. 30. Exemptions from Tax on Corporations
of whatever kind and character of the foregoing organizations from any The following organizations shall not be taxed under this Title in respect to income
of their properties, real or personal, or from any of their activities received by them as such:
conducted for profit regardless of the disposition made of such income, (E) Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
shall be subject to tax imposed under this Code.
veterans, no part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person; xxx
Thus, even if the charitable institution must be "organized and operated (H) A nonstock and nonprofit educational institution;
exclusively" for charitable purposes, it is nevertheless allowed to engage
in "activities conducted for profit" without losing its tax-exempt status for Notwithstanding the provisions in the preceding paragraphs, the income of whatever
its not-for-profit activities. kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed under this Code
The only consequence is that the "income of whatever kind and
character" of a charitable institution "from any of its activities conducted
for profit, regardless of the disposition made of such income, shall be Summary of taxability of income of NSNP EI
subject to tax." Prior to the introduction of Section 27(B), the tax rate on Exemption –
Source of Income Used for:
such income from for-profit activities was the ordinary corporate rate Legal Basis
under Section 27(A). With the introduction of Section 27(B), the tax rate Art. XIV, Sec. 4(3)
Purchase of School
is now 10%. &
Tuition Fees Equipment
Sec. 30(H)
Section 27(B), NIRC Proprietary Purpose Sec. 30(H)
Lease Purchase of School
Art. XIV, Sec. 4(3)
10% Preferential Tax Rate. Section 27(B) of the NIRC imposes a 10% (or other Equipment
preferential tax rate on the income of (1) proprietary non-profit proprietary activity) Proprietary Purpose Not Exempt
educational institutions and (2) proprietary non-profit hospitals. The
only qualifications for hospitals are that they must be proprietary and Source – Sec. 30(H)
non-profit. "Proprietary" means private, following the definition of a Usage - Art. XIV, Sec. 4(3)
"proprietary educational institution" as "any private school maintained
and administered by private individuals or groups" with a government Non-Stock, Non-Profit Hospital
permit. "Non-profit" means no net income or asset accrues to or benefits
any member or specific person, with all the net income or asset devoted Elements
to the institution's purposes and all its activities conducted not for profit. (1) It must be a non-stock corporation or association
(2) Organized exclusively for charitable purpose (Organizational Test)

9 | KAMM Notes

(3) Operated exclusively for charitable purpose; and (Operational
Test)
a. Regular activities exclusively devoted to the accomplishment
of purpose in Sec. 30(E)
(4) No part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer, or any specific person.
What is the test of charity?
Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions
provide for free goods and services to the public which would otherwise
fall on the shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address
public needs, because certain private entities already assume a part of the
burden
Tax Rate; Predominance Test | NSNP Hospitals covered under Sec.
30(E)
Sec. 27 (B) Proprietary Educational Institutions and Hospitals. - Proprietary
educational institutions and hospitals which are nonprofit shall pay a tax of ten percent
(10%) on their taxable income except those covered by Subsection (D) hereof: Provided,
that if the gross income from 'unrelated trade, business or other activity' exceeds fifty
percent (50%) of the total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed
on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of
which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function.
(1) If 50% or more of the income of the NSNP Hospital is sourced from
related activities – the NSNP Hospital is entitled to a preferential
tax rate of 10%
(2) If more than 50% of the income of the NSNP Hospital is sourced
from unrelated activities – the NSNP Hospital is subjected to the
normal tax rate of 30%.
Note: In considering whether the NSNP Corporation or Association is
receiving income from unrelated activities, always consider the purpose
for which it was established. For example, if it is a NSNP hospital – then
the purpose for which it was established is to cater patients who are not
non-paying (charitable). On the other hand, if it caters to paying patients,
then it is conducting an activity for which it was not intended.
CIR vs. DLSU
2015
BIR through a Formal Letter of Demand assessed DLSU deficiency in its
income tax on rental earnings from restaurants/canteens and bookstores
operating within the campus. DLSU, a NSNP EI, principally anchored its
protest on Article XIV, Section 4(3) of the Constitution.
DLSU formally offered to the CTA Division supplemental pieces of
documentary evidence to prove that its rental income was used ADE for
educational purposes.
Can DLSU anchors its exemption from Section 4(3) regardless of the
exception clause under Section 30 of the NIRC?
Yes. The last paragraph of Section 30 of the Tax Code is without force and
effect with respect to NSNP EI, provided, that the NS NP EI prove that its
assets and revenues are used ADE for educational purposes.
The tax exemption granted by the Constitution to NSNP EI is conditioned
only on the ADE of their assets, revenues and income for educational
purposes.
A plain reading of the Constitution would show that Article XIV, Section
4(3) does not require that the revenues and income must have also been
sourced from educational activities or activities related to the purposes
of an educational institution. Thus, so long as the revenues and income
are used ADE for educational purposes, then said revenues and income
shall be exempt from taxes and duties
Angeles University vs. City of Angeles
GR No. 189999 June 27, 2012
Angeles University filed with the Office of the City Building Official an
application for a building permit for the construction of an 11-storey
building of the Angeles University Foundation Medical Center in its main
campus located at MacArthur Highway, Angeles City, Pampanga. Said
office issued a Building Permit Fee Assessment in the amount of
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
₱126,839.20. Petitioner claimed that it is exempt from the payment of the
building permit and locational clearance fees.
Is it exempt from payment of the building permit fee?
No. Since building permit fees are not charges on property, they are not
impositions from which petitioner is exempt. As a rule, if the purpose is
primarily to regulate, then it is deemed a regulation and an exercise of the
police power of the state, even though incidentally, revenue is generated.
Is it exempted from the payment of RPT assessed against its real
property presently occupied by informal settlers?
No. Petitioner failed to discharge its burden to prove that its real property
is actually, directly and exclusively used for educational purposes. While
there is no allegation or proof that petitioner leases the land to its present
occupants, still there is no compliance with the constitutional and
statutory requirement that said real property is actually, directly and
exclusively used for educational purposes. The respondents correctly
assessed the land for real property taxes for the taxable period during
which the land is not being devoted solely to petitioners educational
activities.
Uniformity, Equitability and Progressivity of
Taxation
Uniformity – means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate.
Equitable – taxation is equitable when its burden falls on those better
able to pay.
Progressive – taxation is progressive when its rate goes up depending
on the resources of the person affected
Is a tax law adopting a regressive system of taxation valid?
The Constitution does not really prohibit the imposition of regressive
taxes. What it simply provides is that Congress shall evolve a progressive
system of taxation. The constitutional provision should be construed to
mean simply that ‘‘direct taxes are to be preferred and indirect taxes, as
much as possible, should be minimized.’’ Indeed, the mandate of the
congress is not to prescribe, but to evolve a progressive tax system. This is
a mere directive upon Congress, not a justiciable right or a legally
enforceable one. We cannot avoid regressive taxes but only minimize
them
Non-Imprisonment for Non-Payment of Poll
Taxes
Art. III, Section 20. No person shall be imprisoned for debt or non-payment of a poll tax.
GR: No person shall be imprisoned for debt or non-payment of a poll tax.
XPN:
(1) Falsification
(2) Result to Tax Evasion
Origin of Revenue, Appropriation and Tariff Bills
Art. VI, Section 24. All appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills shall originate exclusively in
the House of Representatives, but the Senate may propose or concur with amendments.
GR: All bills pertaining to ff. shall originate exclusively in the HoR:
(1) Authorizing Increase of the Public Debt
(2) Bills of Local Application
(3) Private Bills
XPN: The Senate may propose or concur with amendments.
Tolentino v. SOF
GR 115455, August 25, 1994
What the Constitution simply means is that the initiative for filing
revenue, tariff, or tax bills, bills authorizing an increase of the public debt,
private bills and bills of local application must come from the HoR on the
theory that, elected as they are from the districts, the HoR can be
expected to be more sensitive to the local needs and problems. On the
other hand, the Senators, who are elected at large, are expected to
10 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

approach the same problems from the National Perspective. Both views (1) As to Object
are thereby made to bear on the enactment of such laws. i. Personal, Poll or Capitation Tax – tax of a fixed amount
imposed on persons residing within a specified territory,
Flexible Tariff Clause whether citizens or not, without regard to their property or
the occupation or business in which they may be engaged
(e.g., community (formerly residence) tax)
Art. VI, Section 28 (2) The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it may impose, tariff
ii. Property Tax – tax imposed on property, real or personal, in
rates, import and export quotas, tonnage and wharfage dues, and other duties or proportion to its value or in accordance with some other
imposts within the framework of the national development program of the reasonable method of apportionment (e.g., real estate tax).
Government. The obligation to pay the tax is absolute and unavoidable and
is not based upon the voluntary action of the person assessed
Limitation iii. Privilege/Excise Tax – it is said that an excise tax is a charge
Does not apply to VAT; it only applies to tariffs, wharfage and custom imposed upon: (1) performance of an act, (2) enjoyment of an
duties. act, or (3) the engagement in an occupation, profession, or
business. The term “excise tax” is synonymous with “privilege
See Permissible Delegation tax” and the two are often used interchangeably (e.g., income
tax, value added tax, estate tax, donor’s tax).
Non-Impairment of Supreme Court’s Jurisdiction
(2) As to Burden
Art. VIII, Section 5. The Supreme Court shall have the following powers:
i. Direct Taxes – taxes which are demanded from persons who
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the also shoulder them (statutory taxpayer); taxes for which the
Rules of Court may provide, final judgments and orders of lower courts in: taxpayer is directly or primarily liable, or which he cannot
(a) All cases in which the constitutionality or validity of any treaty, international or shift to another. The liability for the payment of the tax
executive agreement, law, presidential decree, proclamation, order, instruction, (incidence) and the burden (impact) of the tax falls on the
ordinance, or regulation is in question. same person. (e.g., income tax, estate tax, donor’s tax,
(b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty
community tax)
imposed in relation thereto.
ii. Indirect Taxes – taxes which are demanded from one person
in the expectation and intention that he shall indemnify
Taxation by the LGU himself at the expense of another, falling finally upon the
ultimate purchaser or consumer; taxes levied upon
Art. X, Section 5. Each local government unit shall have the power to create its own transactions or activities before the articles subject matter
sources of revenues and to levy taxes, fees, and charges subject to such guidelines and thereof, reach the consumers who ultimately pay for them
limitations as the Congress may provide, consistent with the basic policy of local
not as taxes but as part of the purchase price.
autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.
Direct Indirect
The burden of tax can
Note: Now a directly conferred power, not merely delegated The burden of tax cannot be
be shifted to the
shifted to the consumer
consumer
Local Autonomy
The purpose of which is to shatter the dependence of the LGUs from the All kinds of business
Income Tax, Estate Tax,
Congress tax, e.g., VAT, Excise
Donor’s Tax and CGT
and Percentage Tax
To impose a tax, there is no need to lobby a law, but there must be an GR: Capital Gains Tax is a direct
enactment of an ordinance. tax because the seller cannot
shift the tax liability
XPN: If there is a contractual
Voting Requirement of Tax Exemptions Can be shifted to the
stipulation between the buyer
consumer even
and the seller.
Art. VI, Sec. 28 (4) No law granting any tax exemption shall be passed without the without a contractual
concurrence of a majority of all the Members of the Congress. stipulation.
However, the stipulation
allowing the shifting of burden
GR: Majority vote in granting Tax Exemption
to the buyer will not change the
XPNs: Majority vote does not apply to revocation of Tax Exemption and
nature of CGT as a direct tax.
Tax Amnesty.

Suppose:
STAGES OR ASPECTS OF TAXATION Mr. A sold a real property to Mr. B classified as a capital asset.

a. Levy – the act of the legislature in choosing the persons, properties, Can Mr. A shift the burden of paying the CGT to Mr. B?
rights or privileges to be subjected to taxation.
b. Assessment and Collection – the act of executing the tax law No. CGT is a direct tax and as such, the burden of tax liability
through administrative agencies of government. cannot be shifted to Mr. B. unless there is a contractual
c. Payment - act of compliance by the taxpayer in contributing his stipulation between the parties that Mr. B will pay the tax.
share to pay the expenses of the government
d. Refund - claim for refund must first be filed with the CIR What is impact and incidence of taxation incidence?
Impact – the tax liability itself. It can never be shifted because
the government will run after the statutory taxpayer
REQUISITES OF A VALID TAX Incidence of tax – refers to the burden of tax.

Requisites (3) As to Tax Rates

a. It must be for a public purpose i. Specific Tax – a tax of a fixed amount imposed by the head or
b. It must be uniform number or by some other standard of weight or
c. The person taxed must be within the jurisdiction of the taxing measurement e.g., taxes on distilled spirits, wines, and
authority fermented liquors; cigars and cigarettes)
d. Assessment and collection is in consonance with due process ii. Ad Valorem Tax – a tax of a fixed proportion of the value of the
clause property with respect to which the tax is assessed e.g., real
e. Tax must not infringe on the inherent and constitutional limitations estate tax, excise tax on automobiles, non-essential goods
of the power of taxation such as jewelry and perfumes, customs duties.
iii. Mixed – a tax that has both the characteristics of specific tax
KINDS OF TAXES and ad valorem tax

11 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

(4) As to Purpose Situs of Taxation [Sec. 42, NIRC]

i. General or Fiscal Tax – levied for the general or ordinary Source of the income. The source is the activity which had produced the
purposes of the Government, i.e., to raise revenue for income.
governmental needs (e.g., income tax, VAT, and almost all
taxes). SOURCE SITUS
ii. Special/Regulatory/Sumptuary Tax – levied for special Where the services have been
Services
purposes, i.e., to achieve some social or economic ends performed
irrespective of whether revenue is actually raised or not (e.g., Interest Income Residence of debtor
protective tariffs or customs duties on imported goods to Sale of Real Property Where the property is located
enable similar products manufactured locally to compete Produced PH;
with such imports in the domestic market) PH
Sold in PH
Produced Income
(5) As to Scope (or authority imposing the tax) outside; Sold sourced
i. National – taxes imposed by the national government, PP
outside outside PH
through Congress and administered by the BIR or BOC (e.g., produced
Sale of Produced PH; Partly within;
national internal revenue taxes, customs duties, and national by TP
Personal Sold outside partly outside
taxes imposed by laws) Property Produced
ii. Municipal or Local – taxes imposed by local governments, Partly within;
outside;
through their respective Sanggunians, and administered by partly outside
Sold PH
the local executive through the local treasurer (e.g., business
Not
taxes that may be imposed under the Local Government The activity which has produced the
produced
Code, professional tax). income i.e., sale
by TP
Where the rentals had been
(6) As to Graduation Rentals
exercised
i. Progressive – The rate of tax increases as the tax base or
Where the royalties had been
bracket increases, e.g., income tax, estate tax, donor’s tax Royalties
exercised
ii. Regressive – The rate of tax decreases as the tax base or
DC Sourced from within
bracket increases.
NRFC Sourced from outside
• There is no regressive tax in the Philippines.
Dividend depend on the source of the gross
iii. Proportionate – The rate of tax is based on a fixed percentage
Income income of the RFC within the 3-year
of the amount of the property, receipts or other basis to be RFC
period prior to the declaration of the
taxed, e.g., real estate tax, VAT, and other percentage taxes
dividend
iv. Digressive – A fixed rate is imposed on a certain amount and
diminishes gradually on sums below it. The tax rate in this
case is arbitrary because the increase in tax rate is not Double Taxation
proportionate to the increase of tax base.
Double Taxation means taxing the same property twice when it should
GENERAL CONCEPTS IN TAXATION be taxed only once; that is, “taxing the same person twice by the same
jurisdiction for the same thing.” [Swedish Match Phils., Inc. v. Treasurer,
G.R. No. 181277 (2013)]
Prospectivity of Tax Laws
Strict Sense (Direct Double Taxation)
GR: Tax laws shall have prospective application
XPN: Retroactive application of tax laws is allowed if it will not amount to Elements
denial of due process. There is a violation of the due process clause when Double taxation exists when the two taxes are imposed on the:
the tax law imposes harsh and oppressive tax. a. Same subject matter
b. For the same purpose
• Tax laws are prospective in operation, unless the language of the c. By the same taxing authority
statute clearly provides otherwise (CIR vs. Acosta) d. Within the same jurisdiction
e. During the same taxing period
Non-retroactive Application of Tax Laws f. Taxes must be of the same kind and character
Sec. 246. Non- Retroactivity of Rulings. - Any revocation, modification or
reversal of any of the rules and regulations promulgated in accordance Broad Sense (Indirect Double Taxation)
with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive There is double taxation in the broad sense or indirect duplicate taxation
application if the revocation, modification or reversal will be prejudicial if any of the elements for direct duplicate taxation is absent.
to the TP, except in the following cases:
(a) TP deliberately misstates or omits material facts from his return or Double taxation, standing alone and not being forbidden by our
any document required of him by the BIR; fundamental law, is not a valid defense against the legality of a tax
(b) Facts subsequently gathered by the BIR are materially different measure [Pepsi Cola v. Mun. of Tanauan, G.R. No. L31156 (1976)].
from the facts on which the ruling is based; or
(c) Where the TP acted in bad faith. Constitutional Prohibition
Double taxation in its general sense is not forbidden in the constitution.
Imprescriptibility There is no constitutional provision which prohibits double taxation in
its general sense. A tax law will only infringe the constitution if it is in the
GR: Taxes are imprescriptible because they are the lifeblood of the nature of a direct double taxation. In the event that there is direct double
government. taxation, the tax will be considered as obnoxious and confiscatory which
XPN: is violative of the due process clause.
(1) Tax Statues may provide a statute of limitations
(2) When taxes are required to be declared in a return such as: Pepsi vs. Municipality of Tanauan
a. Income Tax 69 SCRA 460
b. Donor’s Tax
c. Estate Tax The Municipal Ordinance Tanauan, Leyte levies and collects "from soft
d. VAT drinks producers and manufacturers a tai of 1/16th of a centavo for every
e. Percentage Tax bottle of soft drink corked." For the purpose of computing the taxes due,
the person, firm, company or corporation producing soft drinks shall
submit to the Municipal Treasurer a monthly report, of the total number
Situs of Taxation of bottles produced and corked during the month

12 | KAMM Notes

Subsequently, another Municipal Ordinance was enacted which levies
and collects "on soft drinks produced or manufactured within the
territorial jurisdiction of this municipality a tax of P0.01 per gallon."
Is this a case of double taxation?
No. The former levies or collects from soft drinks producers or
manufacturers a tax of 1/16th of a centavo for every bottle corked,
irrespective of the volume contents of the bottle used. When it was
discovered that the producer or manufacturer could increase the volume
contents of the bottle and still pay the same tax rate, the municipality
enacted the latter, imposing a tax of P0.01 on each gallon. The intention
of the Municipal Council of Tanauan is to substitute for the prior
ordinance and operates as a repeal of the latter, even without words to
that effect.
Nursery Care Corp. et.al vs. Acevado, and City of Manila
GR No. 180651 July 30, 2014
The City of Manila assessed and collected taxes from the individual
petitioners pursuant to Section 15 (Tax on Wholesalers, Distributors, or
Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila.
At the same time, the City of Manila imposed additional taxes upon the
petitioners pursuant to Section 21 of the Revenue Code of Manila, as
amended, as a condition for the renewal of their respective business
licenses for the year 1999.
Is the imposition of tax under Section 14 and 21 considered as
double taxation?
Yes. the Court finds that there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and 21 of Tax Ordinance
No. 7794, since these are being imposed: (1) on the same subject matter
– the privilege of doing business in the City of Manila; (2) for the same
purpose – to make persons conducting business within the City of Manila
contribute to city revenues; (3) by the same taxing authority – petitioner
City of Manila; (4) within the same taxing jurisdiction – within the
territorial jurisdiction of the City of Manila; (5) for the same taxing
periods –per calendar year; and (6) of the same kind or character – a local
business tax imposed on gross sales or receipts of the business.
Tax Treaties as Relief from Double Taxation
International Double Taxation
Double taxation usually takes place when a person is resident of a
contracting state and derives income from, or owns capital in, the other
contracting state and both states impose tax on that income or capital. In
order to eliminate double taxation, a tax treaty resorts to several
methods.
Modes of Elimination Double Taxation
(1) Allowing reciprocal exemption either by law or by treaty
(2) Allowance of tax credit for foreign taxes paid
(3) Allowance of deductions such as for foreign taxes paid, and
vanishing deductions in estate tax; or
(4) Reduction of PH tax rate.
SC Johnson & Johnson
Tax treaties can be used in order to reconcile the national fiscal legislation
of two states. In fact, they can resort to two possible methods in order to
countervail international double taxation.
Exemption method – state of source will impose the tax. State of
residence will grant the tax exemption.
Credit Method – both the state of source and the state of residence shall
impose the tax. However, the state of residence shall grant a tax credit in
favor of the taxpayer.
Note: The state of source will always impose the tax liability because in
terms of the chronological order of principles in imposing the tax liability,
the source principle takes the primordial state
Deutsche Bank v. CIR 188550
August 19, 2013
Tax treaties are entered into "to reconcile the national fiscal legislations
of the contracting parties and, in turn, help the taxpayer avoid
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
simultaneous taxations in two different jurisdictions." CIR v. S.C. Johnson
and Johnson, Inc. further clarifies that "tax conventions are drafted with a
view towards the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the
movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate."
Tax treaties are entered into to minimize, if not eliminate the harshness
of international juridical double taxation, which is why they are also
known as double tax treaty or double tax agreements.
What is the Nature of Exchange of Notes?
An "exchange of notes" is a record of a routine agreement that has many
similarities with the private law contract. The agreement consists of the
exchange of two documents, each of the parties being in the possession
of the one signed by the representative of the other.
Binding even without Legislative Approval
Significantly, an exchange of notes is considered a form of an
executive agreement, which becomes binding through executive
action without the need of a vote by the Senate or Congress.
(Mitsubishi v. CIR, 2017)
CIR vs. BOAC
149 SCRA 395
Doctrine: The source of an income is the property, activity, or service
that produces the income. For the source of income to be considered as
coming from the PH, it is sufficient that the income is derived from
activity within the PH.
An international air carrier with no landing rights in the PH, as a RFC
engaged in business in the PH through its local sales agent that sold and
issued tickets for the airline company.
There is no specific criterion as to what constitutes "doing" or "engaging
in" or "transacting" business. Each case must be judged in the light of its
peculiar environmental circumstances. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain
or for the purpose and object of the business organization." In order that
a FC may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of a temporary
character
BOAC, during the periods covered by the subject-assessments,
maintained a general sales agent in the Philippines. That general sales
agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips —each trip in the
series corresponding to a different airline company; (3) receiving the fare
from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered
through the mode of interline settlement as prescribed by Article VI of
the Resolution No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC
was "engaged in" business in the Philippines through a local agent during
the period covered by the assessments. Accordingly, it is a RFC subject to
tax upon its total net income received in the preceding taxable year from
all sources within the Philippines.
Escape from Taxation
Resulting to losses to Government’s Revenue
(1) Tax Evasion - connotes fraud through the use of pretenses and
forbidden devices to lessen or defeat taxes
(2) Tax Avoidance - a legal means used by the taxpayer to reduce taxes
13 | KAMM Notes

(3) Tax Exemption - a grant of immunity, express or implied, to
particular persons or corporations, from a tax upon property or an
excise tax which persons or corporations generally within the same
taxing districts are obliged to pay
Not resulting to losses
(1) Shifting – the transfer of the burden of tax by the original payer or
the one on whom the tax was assessed or imposed to another or
someone else without violating the law.
(2) Capitalization – a reduction made by the seller on the price of the
real estate in an anticipation of the future tax to be shouldered by
the future buyer
(3) Transformation - it is the scheme where the manufacturer or
produce upon whom the tax has been imposed, fearing the loss of
his market if he should add the tax to the price, pays the tax and
endeavors to recoup himself by improving his process of
production, thereby turning out his units of products at a lower
cost.
a. Shifting of Tax Burden
Shifting – the transfer of the burden of tax by the original payer or the
one on whom the tax was assessed or imposed to another or someone
else without violating the law.
Distinguish: Tax Avoidance and Tax Evasion
Tax Avoidance v. Tax Evasion
Tax avoidance and tax evasion are the two most common ways used by
taxpayers in escaping from taxation.
• Tax avoidance is a tax saving device within the means sanctioned
by law. This method should be used by the TP in good faith and at
arm’s length.
• Tax evasion, on the other hand, is a scheme used outside of those
lawful means and when availed of, it usually subjects the TP to
further or additional civil or criminal liabilities
Elements | Tax Evasion
(1) The end to be achieved, i.e., the payment of less than that known by
the taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due
(2) An accompanying state of mind which is described as being ‘evil,’ in
‘bad faith,’ ‘willful,’ or ‘deliberate and not accidental,’; and
(3) A course of action or failure of action which is unlawful.
CIR vs. Estate of Benigno Toda
GR No. 147188 September 14, 2004
The case at bar stemmed from a Notice of Assessment sent to CIC by the
CIR for deficiency income tax arising from an alleged simulated sale of a
16-storey commercial building known as Cibeles Building. CIC
authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the
two parcels of land on which the building stands for an amount of not less
than ₱90 million. Toda purportedly sold the property for ₱100 million to
Rafael A. Altonaga, who, in turn, sold the same property on the same day
to Royal Match Inc. (RMI) for ₱200 million. These two transactions were
evidenced by Deeds of Absolute Sale notarized on the same day by the
same notary public
For the sale of the property to RMI, Altonaga paid CGT in the amount of
₱10 million.
CIC filed its corporate annual income tax return for the year 1989,
declaring, among other things, its gain from the sale of real property.
Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5
million, as evidenced by a Deed of Sale of Shares of Stocks. Three and a
half years later, Toda died.
CIR stated that a fraudulent scheme was deliberately perpetuated by the
CIC wholly owned and controlled by Toda by covering up the additional
gain of ₱100 million, which resulted in the change in the income structure
of the proceeds of the sale of the two parcels of land and the building
thereon to an individual capital gains, thus evading the higher corporate
income tax rate of 35%.
Was there Tax Evasion or Tax Avoidance?
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Tax Evasion. It is significant to note that as early as 4 May 1989, prior to
the purported sale of the Cibeles property by CIC to Altonaga on 30
August 1989, CIC received ₱40 million from RMI, and not from Altonaga.
That ₱40 million was debited by RMI and reflected in its trial balance as
other inv. Cibeles Bldg. Also, as of 31 July 1989, another ₱40 million was
debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This
would show that the real buyer of the properties was RMI, and not the
intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a
close business associate and one of the many trusted corporate
executives of Toda. This information was revealed by Mr. Boy Prieto, the
assistant accountant of CIC and an old timer in the company. The scheme
resorted to by CIC in making it appear that there were two sales of the
subject properties, i.e., from CIC to Altonaga, and then from Altonaga to
RMI cannot be considered a legitimate tax planning. Such scheme is
tainted with fraud.
Here, it is obvious that the objective of the sale to Altonaga was to reduce
the amount of tax to be paid especially that the transfer from him to RMI
would then subject the income to only 5% individual capital gains tax,
and not the 35% corporate income tax. Altonagas sole purpose of
acquiring and transferring title of the subject properties on the same day
was to create a tax shelter. Altonaga never controlled the property and
did not enjoy the normal benefits and burdens of ownership. The sale to
him was merely a tax ploy, a sham, and without business purpose and
economic substance. Doubtless, the execution of the two sales was
calculated to mislead the BIR with the end in view of reducing the
consequent income tax liability.
Exemption from Taxation
Tax exemption
A grant of immunity, express or implied, to particular persons or
corporations, from a tax upon property or an excise tax which persons or
corporations generally within the same taxing districts are obliged to pay
Nature
(1) Personal in nature and covers only taxes for which the grantee is
directly liable
(2) Strictly construed against the TP
(3) GR: Exemptions are not presumed
XPN: But when public property is involved, exemption is the rule
and taxation the exemption.
Kinds
(1) Express – expressly granted under the Constitution or statute
(2) Implied – when particular persons, properties or excises are
deemed exempt as they fall outside the scope of the taxing
provision
• Not applicable in the PH
(3) Contractual – agreed to by the taxing authority in contracts
entered into by them in their proprietary capacity
What is the rationale for the grant of tax exemption?
Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions
provide for free goods and services to the public which would otherwise
fall on the shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of the
burden.
Revocation of Tax exemption
(1) When allowed – when granted by the government through
legislative franchises
(2) When not allowed – when granted by the government when it
entered into ordinary contracts in its proprietary capacity (Non-
impairment clause)
Tax Amnesty
Refers to the condonation of an existing tax liability
Tax Assumption v. Tax Exemption
Tax Assumption Tax Exemption
To ‘‘assume’’ means ‘‘to take on, An exemption, being the
become bound as another is ‘‘freedom from a duty, liability or
bound, or put oneself in place of other requirement’’ or a
another as to an obligation or ‘‘privilege given to a judgment
14 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

liability.’’ This means that the debtor by law, allowing the

obligation or liability remains, debtor to retain a certain The doctrine of equitable recoupment means that when the refund of a
although the same is merely property without liability.’ tax illegally or erroneously collected or overpaid by a TP is barred by the
passed on to a different person. statute of limitations and a tax is being presently assessed against a TP,
said tax may be recouped or set off against the tax, the refund of which
Mitsubishi Corp. vs. CIR has been barred.
June 5, 2017
Possible Bar | Exchange of Notes Note: This is not applicable in the PH

The governments of Japan and the PH executed an Exchange of Notes,
whereby the former agreed to extend a loan amounting to
¥40,400,000,000 to the latter through the then Overseas Economic
Cooperation Fund for the implementation of the Calaca II Coal-Fired
Thermal Power Plant Project (Project). In Paragraph 5 (2) of the
Exchange of Notes, the PH Government, by itself or through its executing
agency, undertook to assume all taxes imposed by the PH on Japanese
contractors engaged in the Project
The NPC, as the executing government agency, entered into a contract
with Mitsubishi Corporation (i.e., petitioner's head office in Japan) for the
engineering, supply, construction, installation, testing, and
commissioning of a steam generator, auxiliaries, and associated civil
works for the Project (Contract). The Contract's foreign currency portion
was funded by the OECF loans. In line with the Exchange of Notes, Article
VIII (B) (1) of the Contract indicated NPC’s undertaking to pay any and all
forms of taxes that are directly imposable under the Contract.
Mitsubishi claimed for refund of ₱52,612,812.00, representing the
erroneously paid amounts of ₱44,288,712.00 as income tax and
₱8,324,100.00 as BPRT corresponding to the OECF-funded portion of the
Project.
Prohibition on Compensation and Set-Off
GR: Taxes cannot be the subject of set off because the government and
the taxpayer are not creditors and debtors of each other.
XPN: If both the claim of the government and the taxpayer are already
liquidated and demandable, i.e., when the claim against the government
has already been recognized and an amount has already been
appropriated for that purpose. (Domingo v. Garlitos, L-18994, 1963)
Philex vs. CIR
August 29, 1998
The BIR sent a letter to Philex asking it to settle its tax liabilities for the
2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of
1992 in the total amount of ₱123,821,982.52. Philex protested the
demand for payment of the tax liabilities stating that it has pending claims
for VAT input credit/refund for the taxes it paid for the years 1989 to
1991 in the amount of ₱119,977,037.02 plus interest. Therefore, these
claims for tax credit/refund should be applied against the tax liabilities.
Can it be subject to set-off?

Is the claim valid?
Yes. The PH assumed the tax liability. It is fairly apparent that the subject
taxes in the amount of ₱52,612,812.00 was erroneously collected from
petitioner, considering that the obligation to pay the same had already
been assumed by the PH Government by virtue of its Exchange of Notes
with the Japanese Government. Case law explains that an exchange of
notes is considered as an executive agreement, which is binding on the
State even without Senate concurrence. In Abaya v. Ebdane:
An "exchange of notes" is a record of a routine agreement that has many similarities
with the private law contract. The agreement consists of the exchange of two
documents, each of the parties being in the possession of the one signed by the
representative of the other. Under the usual procedure, the accepting State repeats the
text of the offering State to record its assent. The signatories of the letters may be
government Ministers, diplomats or departmental heads. The technique of exchange of
notes is frequently resorted to, either because of its speedy procedure, or, sometimes, to
avoid the process of legislative approval.
To "assume" means "[t]o take on, become bound as another is bound, or
put oneself in place of another as to an obligation or liability." This means
that the obligation or liability remains, although the same is merely
passed on to a different person. In this light, the concept of an assumption
is therefore different from an exemption, the latter being the "freedom
from a duty, liability or other requirement" or "a privilege given to a
judgment debtor by law, allowing the debtor to retain a certain property
without liability."
Taxes cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each other.
There is a material distinction between a tax and debt. Debts are due to
the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. We find no cogent reason to
deviate from the aforementioned distinction
There can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on
the ground that the government owes him an amount equal to or greater
than the tax being collected. The collection of tax cannot await the results
of a lawsuit against the government.
Compromise
A contract whereby the parties, by making reciprocal concessions, avoid
litigation or put an end to one already commenced [Art. 2028, Civil Code].
It involves a reduction of the taxpayer’s liability.
Requisites
(1) The taxpayer must have a tax liability
(2) There must be an offer (by the TP or CIR) of an amount to be paid
by the taxpayer.
(3) There must be acceptance (by the TP or CIR, as the case may be)
of the offer in settlement of the original claim

As explicitly worded, the PH Government, through its executing agencies Tax Amnesty
(i.e., NPC in this case) particularly assumed "all fiscal levies or taxes
imposed in the Republic of the PH on Japanese firms and nationals
A tax amnesty partakes of an absolute forgiveness or waiver by the
operating as suppliers, contractors or consultants on and/or in
Government of its right to collect what otherwise would be due it, and in
connection with any income that may accrue from the supply of products
this sense, prejudicial thereto, particularly to give tax evaders, who wish
of Japan and services of Japanese nationals to be provided under the
to relent and are willing to reform a chance to do so and become a part of
Loan." The PH Government's assumption of "all fiscal levies and taxes,"
the new society with a clean slate. [Republic v. IAC, G.R. No. L-69344
which includes the subject taxes, is clearly a form of concession given to
(1991)]
Japanese suppliers, contractors or consultants in consideration of the
Loan, which proceeds were used for the implementation of the Project.
Construction and Interpretation
As part of this, NPC entered into the Contract with Mitsubishi
A tax amnesty, much like a tax exemption, is never favored nor presumed
Corporation (i.e., petitioner's head office in Japan) for the engineering,
in law. If granted, the terms of the amnesty, like that of a tax exemption,
supply, construction, installation, testing, and commissioning of a steam
must be construed strictly against the taxpayer and liberally in favor of
generator, auxiliaries, and associated civil works for the Project, which
the taxing authority
foreign currency portion was funded by the OECF loans. Thus, in line
with the tax assumption provision under the Exchange of Notes, the
Contract states that NPC shall pay any and all forms of taxes that are CONSTRUCTION, AND
directly imposable under the Contract
INTERPRETATION OF TAX LAWS,
RULES AND REGULATIONS
Equitable Recoupment

15 | KAMM Notes

Strictly against the government and in
Imposing Tax Liability
favor of the taxpayer
Construed strictissimi juris against the
claimants and liberally in favor of the
taxing authority
Granting
exemption/deductions Note: Tax refunds are in the nature of
tax exemptions. Thus, they are
construed strictissimi juris against the
taxpayer
First, apply the principle of strict
interpretation.
In case of ambiguity
Then subsequently apply the
principle of strictissimi juris
CIR v. CA
GR 115349. April 18, 1997
Petitioner CIR erred in applying the principles of tax exemption without
first applying the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and impractical to
determine who are exempted without first determining who are covered by
the aforesaid provision. The Commissioner should have determined first
if private respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens on the
populace, before asking Ateneo to prove its exemption therefrom. The
Court takes this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that (a) statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. x
x x (A) tax cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the
letter in construing statutes applies with peculiar strictness to tax laws
and the provisions of a taxing act are not to be extended by implication.
Parenthetically, in answering the question of who is subject to tax
statutes, it is basic that in case of doubt, such statutes are to be construed
most strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import.
II. NATIONAL TAXATION
INCOME TAX
Definition, Nature, and General Principles
Income Tax Systems
i. Global
A system where the tax treatment views indifferently the tax base and
generally treats in common all categories of taxable income tax payer
The income of the TP is not classified because all kinds of income shall be
subject to the same tax treatment
ii. Schedular
A system where the income tax treatment varies and made to depend on
the kind or category of taxable income of the taxpayer.
The income has to be classified because each type of income is subject to
different tax treatments.
iii. Others
Semi-global/Mixed
It is a combination of both global and scheduler tax treatment
Note: The PH adopts the semi-global/mixed tax system.
• For corporate taxpayer - global tax treatment
• For individual tax payer – schedular
Features of the Philippine Income Tax Law
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Direct Tax – The tax burden is borne by the income recipient upon
whom the tax is imposed
Progressive – The tax rate increases as the tax base increases. It is
founded on the ability to pay principle and is consistent with Sec. 28, Art.
VI, 1987 Constitution.
Comprehensive – The PH has adopted the most comprehensive system
of imposing income tax by adopting the citizenship principle, the
residence principle, and the source principle.
Any of the three principles is enough to justify the imposition of income
tax on the income of a resident citizen and a domestic corporation that
are taxed on a worldwide income
Semi-Schedular or Semi-Global Tax System – Although certain
passive investment incomes and capital gains from sale of capital assets
(namely: (a) shares of stock of domestic corporations, and (b) real
property) are subject to final taxes at preferential tax rates
Criteria in Imposing Philippine Income Tax
(1) Citizenship
a. Resident Citizen - On his worldwide income
b. Non-Resident Citizen - Only on his income from sources
within the PH
(2) Residence
A resident alien is liable to pay PH income tax only on his income
from sources within the PH but is exempt from tax on his income
from sources outside the PH
(3) Source
An alien is subject to PH income tax because he derives income
from sources within the Philippines. Thus, a NRA or NRFC is liable
to pay PH income tax on income from sources within the PH, such
as dividend, interest, rent, or royalty, despite the fact that he has not
set foot in the PH.
General Principles of Income Taxation
Note: General Principles are already incorporated in other subtopics.
Sec. 284, LGC is unconstitutional
Congressman Mandanas v. Ochoa
G.R. No. 199802, April 10, 2019
What the phrase national internal revenue taxes as used in Section 284
included are all the taxes enumerated in Section 21 of the National
Internal Revenue Code (NIRC), as amended by R.A. No. 8424, viz.:
Section 21. Sources of Revenue. — The following taxes, fees and charges
are deemed to be national internal revenue taxes:
(a) Income tax;
(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and collected by
the Bureau of Internal Revenue.
In view of the foregoing enumeration of what are the national internal
revenue taxes, Section 284 has effectively deprived the LGUs from
deriving their just share from other national taxes, like the customs
duties.
The phrase national internal revenue taxes engrafted in Section 284 is
undoubtedly more restrictive than the term national taxes written in
Section 6. As such, Congress has actually departed from the letter of the
1987 Constitution stating that national taxes should be the base from
which the just share of the LGU comes. Such departure is impermissible.
Verba legis non est recedendum (from the words of a statute there should
be no departure). Equally impermissible is that Congress has also
thereby curtailed the guarantee of fiscal autonomy in favor of the LGUs
under the 1987 Constitution.
Types of Philippine Income Taxes
16 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

(1) Graduated income tax and fixed tax on gross sales or receipts for Is the income of the corporation subject to tax?
individuals
(2) NCIT It is a contract of piece of work, hence the situs of the income is HK.
(3) MCIT As such, the ₱1 million is not subject to tax because a NRFC will not
(4) Special income tax on certain corporations be subject to tax from income source from without. (CIR v.
(5) CGT on sale or exchange of unlisted S/S of a DC classified as capital Marubeni)
assets
(6) CGT on sale or exchange of real property located in the PH classified However, the interest income is subject to tax because the situs of
as a capital asset interest income is the residence of the debtor. Since the debtor is a
(7) FWT on certain passive investment income paid to residents resident citizen, the income is subject to tax. (CIR v. NDC)
(8) FWT on income payments made to non-residents
(9) FBT on fringe benefits of supervisory or managerial employees (5) Non-Resident Alien not Engaged in Trade or Business
(10) BPRT (NRANETB)
(11) IAET Subject to 25% FWT based on the gross income.

Kinds of Taxpayers ii. Corporate Taxpayers

i. Individual TP (1) Domestic Corporation - a corporation created or organized in the

PH or under its laws.
(1) Resident citizens (RC) (2) RFC – foreign corporation engaged in trade or business within the
PH
(2) Non-resident citizens (NRC) (3) NRFC – foreign corporation not engaged in trade or business
a. A PH citizen who establishes to the satisfaction of the CIR the within the PH
fact of his physical presence abroad with a definite intention
to reside therein. iii. Estates
b. A PH citizen who leaves the PH during the taxable year to
reside abroad, either as an immigrant or for employment on a Judicial Settlement | Separate TP
permanent basis. It will be considered a separate TP if the settlement of the estate is judicial
c. A PH citizen who works and derives income from abroad and in nature
whose employment thereat requires him to be physically
present abroad most of the time (183 days) during the taxable Suppose:
year. Mr. A owns a property which earns income. Mr. A died on June 1, 2018.
d. A citizen who has been previously considered as NRC and
who arrives in the PH at any time during the taxable year to Who shall be considered as the TP?
reside permanently in the PH shall likewise be treated as a
NRC for the taxable year in which he arrives in the PH with The TP from January to June is Mr. A. The TP from June to December will
respect to his income derived from sources abroad until the depend on the settlement of the estate, i.e.:
date of his arrival in the PH.
• considered only as a NRC during the beginning of the Extra Judicial Settlement
taxable year from the time of arrival GR: TP will be the heirs.
• from the time of his arrival up to the end of his taxable XPN: If the heirs put their funds together in order to earn more income,
year, he will now be considered as a RC then the heirs are considered to have created an unregistered partnership
subject to corporate TP. The income earned shall be treated as dividend
Suppose: income subject to FWT.
Mr. A was employed by a multi-national company which has a
branch at Makati City, during TY 2020, A was sent to Japan on Judicial Settlement
January, Feb, March, June, July, October, November. During his stay TP will be the estate because the owners of the properties are not yet
at Japan, he received salaries and allowances in dollars. The salaries known
and allowances were paid through his bank account.
iv. Trusts
Will the salaries and allowances received by A during his stay
in Japan will be considered as taxable income? Depends of the Revocability
It will be considered as a separate TP if the designation of the beneficiary
No. A is considered as a NRC, because he works and derives income is irrevocable. It will be considered as irrevocable trust.
from abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable year, Irrevocable
and as such, is only taxable for income sourced from within the PH. Suppose:
Since the service was performed outside of the PH, it is sourced A established a trust of ₱10M and constituted BPI as a trustee and
from outside and as such, the income is non-taxable. designated M as a beneficiary. The designation was stated to be
irrevocable.
(3) Resident Alien - if the alien stayed here for more than 1 calendar
year, he is considered a Resident of the PH Who shall report the income of the trust?

(4) Non-Resident Alien Engaged in Trade or Business (NRAETB) The trust itself. A does not have control over the property. Hence, the
income earned but not distributed from the property held in trust is
Rules owned by the trust for the meantime.
a. Has a business in the PH – NRAETB
• Even if he only stayed for 1 day in PH Revocable
b. NRA stayed for an aggregate period of more 180 days during The trustor still has control over the property. Hence, he will report the
any calendar year shall be deemed a NRAETB income of the trust as his income.

Suppose: Suppose:
Mr. A ordered equipment from HK Corporation. HK corporation The income from the trust is 500k. 100k was distributed to the
will manufacture the equipment based on the specs provided by beneficiary.
Mr. A. Mr. A and HK Corp agreed that ₱1 million shall be paid as
follows: How much is the income of the trust?
500k – upon execution of agreement
500k – promissory note with 10% interest

17 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

500k, the distribution of the income to the beneficiary shall be treated as

a special deduction. Income v. Capital
CAPITAL INCOME
How much is the net income of the trust? Fund Flow
A flow of services rendered by that capital by
400k, because the distribution to the beneficiary is considered as a A fund of property
the payment of money from it or any other
special deduction existing at an
benefit rendered by a fund of capital in
instant of time is
relation to such fund through a period of time
called capital
Estates v. Trusts is called income
ESTATES TRUSTS Capital is wealth Income is the service of wealth
Mass of property, Tree Fruit
rights, and obligations Not Taxable Taxable
left behind by the Arrangement whereby
decedent upon his the trustor grants the When Income is Taxable
death. control of certain
Definition
property in the person of Requisites of Taxability of Income
For purposes of income the trustee for the benefit (1) Existence of gain or income
tax, an estate may be of the beneficiary (2) Realization of gain or income
under judicial (3) The gain or income must be not excluded by law
administration.
Judicial Types of Realization of Gain
Administration (1) Actual – a situation where the TP is in physical possession of the
The Executioner or Irrevocable gain
Administrator shall file Trustee (fiduciary) is the (2) Constructive – a situation where the TP does not yet physically
the return and pay the one who will file the possess the gain but has control over it
tax on the net income of return and pay the tax
the estate thereon for the trust
On Dividend Income
Who Files
The corporation declared a dividend income in favor of the SH on January
Not Judicial Revocable
1, 2020, but will be distributed on March 15, 2021.
Administration Income of such part of the
Heirs shall include in trust shall be included in
Will we consider the income as a realized gain?
their respective returns computing the taxable
their distributive income of the grantor
Yes. The right of control over the dividend income will arise from the date
shares in the net
of declaration. In fact, the SH can even file a complaint when the
income of the estate.
corporation will not distribute the dividends. Hence, the right to collect
Composition
the tax will accrue from the time of declaration.
of Gross Same as that of an individual TP
Income
1. Same to an individual (3) Presumptive– the gain is dictated by law
taxpayer
2. Amount of income of On CGT
1. Same to an the trust which is to A sold a person of land for 1 million, and bought it for 2 million, A incurred
individual taxpayer be distributed a loss.
2. Amount of income currently to the
Deductible
of the estate that is beneficiaries Will a incur tax liability?
expense
paid or credited to 3. Amount of the income
any legatee, heir, or collected by the Yes. Notwithstanding the fact that A incurred a loss, the law already
beneficiary. guardian of an infant dictated the amount of gain with respect to real property classified as
which is to be held or capital asset based on its GSP or FMV whichever is higher.
distributed as the
court may direct GPP as a pass-through entity
Accounting On gains in GPP
Calendar Year
Period
BTS formed a GPP during the year, the GPP earned ₱3M. The partners
decided to distribute 500k among themselves and retain the 1.5 million.
Taxable Period
How much is the income of the GPP which will be subject to tax?
'Taxable year' means the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the net income is computed None. A GPP is not an income taxpayer, it is merely a pass-through entity.
under this Title. The taxpayers are the partners themselves. (A GPP as such shall not be
subject to the income tax imposed under this Chapter. Persons engaging in
'Taxable year' includes, in the case of a return made for a fractional part business as partners in a GPP shall be liable for income tax only in their
of a year under the provisions of this Title or under rules and regulations separate and individual capacities)
prescribed by the SOF, upon recommendation of the CIR, the period for
which such return is made. How much is the taxable income of each of the partners?

'Fiscal year' means an accounting period of twelve (12) months ending
on the last day of any month other than December.
• For Individual TP – Taxable/Calendar Year
• For Corporate TP – Fiscal Year
Concept of Income
Definition
Income is any wealth which flows into the taxpayer other than a return
of capital.
Capital constitutes the investment which is the source of income
₱1M each. Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of the
partnership
What is the tax implication of ₱1 million received by the partners
from the partnership?
It will be considered as income earned from Business, Trade or
Profession which is subject to normal tax/graduated tax rates. (See
TRAIN Law where the business partnership is now allowed to claim 8%
tax rate based on the taxable income.)
What if BTS formed a Business Partnership, how much is the income
of the business partnership?
18 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Claim of right doctrine – an income shall be recognized if there is the

₱3 million which will be subject to corporate income tax. A business presence of an alleged right to the income and an absence of a definite
partnership is considered as a corporate TP. The partners will be treated unconditional obligation to return.
as SH.
Suppose:
How much is the taxable income of each of the partners? A left 100k on the table, borrowed by B.

₱1M. With respect to the income earned by a partner from a partnership, Is it considered as income?
whether a GPP or a business partnership, we apply actual or constructive
income. (Section 73(d). The taxable income declared by a partnership for a No. While there is presence of a right to the income, there is presence of a
taxable year which is subject to tax under Section 27(A) of this Code, after definite conditional obligation to return.
deducting the corporate income tax imposed therein, shall be deemed to
have been actually or constructively received by the partners in the same
Suppose:
taxable year and shall be taxed to them in their individual capacity, whether
A left 100k on the table, B took it without consent.
actually distributed or not.)
Is it considered an income?
What is the tax implication of the ₱1M income received by the
partners?
Yes. There is presence of alleged right to the income and there is presence
of unconditional obligation to return because there was no agreement
It will be considered as a dividend income subject to FWT at:
that he will return the money
(1) 10% if the partner is RC/NRC/RA;
(2) 20% if the partner is a NRAETB;
(3) 25% if the partner is a NRANETB. A, out of generosity, gave B 100k

Is it considered as income subject to income tax?

Deductions
GENERAL PROFESSIONAL PARTNERSHIP
It is income because there is flow of wealth but it is not subject to income
GPP PARTNERS IMPLICATION
tax because it is excluded by law (i.e., donation)
Not Allowed
When the GPP availed of the 40%
iv. Income from Whatever Source
OSD, it is deemed that the partners
OSD OSD
were the ones who have availed of
Income from whatever source – income regardless of the source,
the 40% OSD because we do not
whether legal or illegal, shall be considered as a taxable income.
consider the GPP as an income TP
Itemized Not Allowed
OSD v. Tax Benefit Rule
Deduction Such election when made in the
return shall be irrevocable for the
Itemized Tax Benefit Rule – an income shall be recognized when a TP recovers an
OSD taxable year for which the return is
Deduction expense and obtained a tax benefit from the recognition of such expense
made.
It Depends
Provisions relative to Tax Benefit Rule
In cases when the GPP avail of the
Sec. 32(E)(1). – The taxpayer is obliged to declare as taxable income subsequent
Itemized Itemized ID, the partners can avail of the ID
recovery of bad debts in the year they were collected to the extent of the tax benefit
Deduction Deduction provided that the deductions to be enjoyed by the taxpayer when the bad debts were written off and claimed as a
recognized by the partners were deduction from income.
not recognized by the GPP.
Sec. 34(C)(1). –The taxpayer is also required to report as taxable income the subsequent
BUSINESS PARTNERSHIP tax refund or tax credit granted to the extent of the tax benefit the taxpayer enjoyed
BP PARTNERS IMPLICATION when such taxes were previously claimed as deduction from income.
OSD OSD
Not Allowed Elements
Itemized
OSD The income of the partners is (1) There must be a recovery of an expense
Deduction
subject to 10% FWT which is (2) Such expense must have been recognized
Itemized
OSD subject to gross amount of dividend (3) Recognition of the expense resulted to a tax benefit on the part of
Deduction
income not subject to any the TP
Itemized Itemized
deduction. [It is a passive income]
Deduction Deduction
Inapplicability of Tax Benefit | Allowable Deduction
The tax benefit rule is not applicable when the expense is not considered
Test in Determining Whether Income is Earned
as an allowable deduction.
for Tax Purposes
Suppose:
i. Realization Test or Severance Test A paid income tax of 100k when he should’ve paid 80k, A filed a refund
which was granted.
Severance/realization test – this test is complied with when the income
earner can segregate the capital from the income. Is it considered a taxable income under the tax benefit rule?

ii. Economic Benefit Test or the Doctrine of Proprietary Interest No. Income tax is not a deductible expense, hence, there can be no tax
benefit
The economic benefit test/the doctrine of proprietary interest - If
there is an increase in the net worth of the taxpayer, the increase in the
Deductible Taxes (CAMILDOPE)
net worth shall be presumed to be an income earned during such period.
Only the ff. are taxes considered as deductible
(1) Community Tax
Rebuttable Presumption
(2) Automobile Registration Fee
This particular rule gives a rebuttable presumption that the increase in the
(3) Municipal Tax
net worth is considered an income.
(4) Import Duties
(5) Local Business Tax
Note: Normally used in tax fraud cases.
(6) Documentary Stamp Tax
(7) Occupational Tax
iii. Claim of Right Doctrine or Doctrine of Ownership, Command
(8) Percentage Tax
or Control
(9) Excise Tax

19 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Suppose: year that proportion of the installment payments actually received in that
Doña Evelina paid local business taxes. A year thereafter, she realized that year
she should have not paid such tax. She filed a refund; the refund was
granted. (1) Personal Property
a. Regular Sale on Installment Basis; or
Is the recovery of the LBT a taxable income? b. Casual Sale of Property

Yes. If the recognition of the LBT resulted to a tax benefit in favor of Doña Regular sale (Installment Sale)
Evelina, the refund of the local business tax shall be considered as a If the TP is regularly selling personal property, it is considered as an
taxable income. Installment Sale.

Casual Sale
Suppose:
GR: If the TP is not on regular engagement of selling PP – it will be
Doña Evelina earned a net income of 100k. Doña Evelina paid 200k LBT.
only classified as a Casual Sale of pp
XPN: It will be considered as an installment if:
Can Doña Evelina consider the Local Business Tax as Expense?
a. There is compliance with the 25% rule (i.e., if the initial
payment does not exceed 25% of the GSP); and
Yes, resulting to a net loss of 100k.
b. The gross selling price shall exceed ₱1,000

Suppose: (2) Real Property

Doña filed a refund of 200k LBT which was granted.
Will the recovery of the 200k subject to income tax?
Tax benefit of 100k. the remaining 100k did not result to any benefit in
favor of a taxpayer
Only one condition: whether the RP is CA/OA - Must comply with
the 25% condition or rule
What is the 25% rule?
The transaction will be classified as an installment, if the initial payment
does not exceed 25% of the Gross Selling Price

Corporate Taxpayer Initial Payment are payments received by the TP whether cash or
1st 2nd 3rd property but other than evidence of indebtedness during taxable year of
Net Income 100,000 50,000 0 sale.
Bad Debts Expense 100,000 100,000 100,000 • Initial Payment is different from downpayment
Taxable Income 0 -50,000 -100,000
What if is exceeds the 25%?
Suppose: It shall be considered as a Deferred Sale.
A year after the recognition of bad debts, the bad debts which has been
recognized as an expense has been recovered. Note: In Installment Basis, TP will only recognize the net income
equitable to the ratable portion of the collection that bears over the GSP.
Will the recovery be treated as taxable income?
Suppose:
As to the 1st year, yes. All the elements of the tax benefit rule are present. Tin is selling her car for 1 million. She bought it for 600,000. The sale
The taxpayer benefitted because he will no longer pay any tax because would have a net income of 400,000. Tin and the buyer agreed that
the recognition of the bad debt. 350,000 will be paid on the date of the execution of the deed which is
October 22, 2020. The remaining 650,000 will be paid on equal
As to the 2nd year, yes. Taxpayer benefitted up to the extent of 50k. installments in the year 2021.

As to the 3rd year, no. The taxpayer did not benefit from the recognition of
the expense because he has no income. Hence, it is not a taxable income.
Individual Taxpayer
Note: Under the TRAIN law - 250k or less income, the individual taxpayer
is exempt from tax.
Suppose:
Using the same setup, will there be a benefit in favor of the individual
taxpayer?
No, since the income is already exempt from tax, the recognition and
subsequent recovery of the expense did not result to a benefit in favor of
the individual taxpayer
Is this on an installment sale?
No. This is not an installment sale. It can only be considered as an
installment sale if the gross selling price is more 1,000 and the initial
payments do not exceed 25% of the gross selling price. Here, the initial
payment is 350,000 which exceeds 25% of the gross selling price and
therefore it cannot be considered as installment basis. This is considered
as deferred sale.
Being a deferred sale, how much is the income that is to be
recognized in the year 2018?
It will be the entire 400,000 pesos. Since the sale is not in an installment
basis, the income shall not be likewise recognized in an installment basis.

Methods of Accounting Suppose:

i. Distinguish: Cash and Accrual Method
Cash method – income, profits and gains earned are not included in
gross income until received, and expenses are not deducted until paid.
Accrual method – income, profits and gains are included in gross
income when earned, whether received or not, and expenses are allowed
as deductions when incurred, although not yet paid.
• It is the right to receive and not the actual receipt that determines
the inclusion of the amount in gross income
ii. Installment and Deferred Sales or Transaction
In the above example, the buyer and Tin agreed that an initial payment of
250,000 will be paid on October 22, 2020 and on December 31, 2020, the
buyer will pay an additional 100,000. On June 30, 2021, the buyer will pay
325,000 and the remaining 325,000 is to be paid on December 31, 2021.
How much income should be recognized on the year 2020 which is
the year of sale?
400,000. This is considered as a deferred sale, the initial payment for the
year 2018 is 350,000 which exceeds the 25% gross selling price. The
entire amount of the net income of 400,000 shall be recognized in the
year of 2020 as it cannot be recognized as an installment income due to
the fact that the sale is not on installment basis.

Installment Basis [Sec. 49, NIRC] What if, in the example above, the 100,000 paid on December 31,
A person who regularly sells or otherwise disposes of personal property 2018 will be paid on January 1, 2019. Is this an installment sale?
on the installment plan may return as income therefrom in any taxable

20 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Yes. The initial payment made in the year of sale which is 2018 is only In this case, the TP does not have the option to adopt lump sum method.
250,000 which does not exceed 25% of the gross selling price. He must adopt percentage of completion method.

Bañas v. CA Situs of Income

G.R. No. 102967, February 10, 2000
Discounting of Promissory Note (1) Services – where the services have been performed
a. Bank deposits/deposit substitutes – 20% FWT
GSP – ₱1M b. All others – Normal Tax
2019 – 20% initial payment (200,000)
Buyer issued a PN with a value of 800,000 on 2019. However, it indicates (2) Interest Income – resident of the debtor
the amount will be paid on the succeeding year. PN is an evidence of
indebtedness. In 2019, this PN has been discounted by the buyer. (3) Dividends – depend on the issuer corporation

Will we consider this as a regular sale on an installment basis? Issuer is:

a. DC – entirely sourced from within
No. This is already considered as a Cash Sale, because of the presence of b. NRFC – entirely sourced from outside
a discounted note. c. RFC – depends on the gross income during the 3-year period
prior to the declaration of dividend
PBCOM vs. BDO i. 50% or more – ratable portion
Interest Income | Landmark Case with respect to Deposit Substitute ii. Less than 50% - entirely sourced from outside

Bureau of Treasury issued a peace bond. Issued to Code NGO. They hired Suppose:
RCBC. BDO is one of those who got a bond from RCBC. Income Interest – Mr. A is a NRC. He earned the ff. dividend income:
FWT 20% if earned from Bank Deposits. Otherwise, Normal Tax. 100,000 – from PG Corporation, PH
200,000 – from a Multinational Corporation
WON the Peace Bonds are considered as Deposit Substitute. 300,000 – from HK Corporation, NRFC

Deposit Substitutes are any borrowings from the Public. Which among the dividend income is subject to tax?

Public – 20 or more lenders at any one time. (20 lender rule + at any one 100,000 from PG is subject to tax because it is considered as
time) sourced from within.

Lenders – lenders in primary market (BOP to CODE NGO) which includes
lenders in the secondary market (individuals to whom the RCBC had
transacted with)
In determining the number of the Lenders, there is the necessity to
determine the number of lenders within the primary market and the
secondary market. So, if RCBC transacted with more than 20 lenders,
then it shall be considered as a Deposit Substitute and it shall be subjected
to 20% FWT. Otherwise, the interest income will be subject to normal tax.
200,000 from a Multinational Corporation is subject to tax if 50%
or more of the gross income of the RFC was sourced from within
during the 3-year period immediately preceding the issuance of the
dividend
300,000 from HK Corporation is not subject to tax because the
issuer is a NRFC, hence the source of DI is outside the PH
What is the tax implication?

At any one time – during the entire duration of life of the bond.
Transactions during the entire duration shall include transactions during
the secondary market.
In this case, the BIR issued Memo Cir., stating that the peace bonds shall
be exempt from Tax. This issuance was released at the time the BOP
issued the peace bonds.
100,000 is subject to a 10% FWT
200,000 is subject to a 10% FWT because the RFC has a
representative or liason officer or a branch which is located the PH
300,000 is not subject to tax because it is sourced from outside of
the PH

Several months thereafter, when CODE BPO and RCBC already

(4) Rents and Royalties - where they are exercised
transacted, BIR already issued a memo that it shall be subject to FWT.

(5) Sale of Personal Property – where the property was sold

Note: Sec. 246. Non-retroactivity of Ruling. Any revocation, modification or reversal
of any of the rules and regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the Commissioner shall GR: Where the property was sold
not be given retroactive application if the revocation, modification or reversal will be XPN:
prejudicial to the taxpayers. a. Stocks from DC
Gains from sales of S/S from a DC shall be treated as derived
However, all transactions after this Ruling, shall not be subject to FWT from sources within the PH regardless of where said shares
20% on the Interest Income derived from the Peace Bonds. were sold
b. Manufactured Personal Property
iii. Percentage of Completion The income shall be treated as derived partly from sources
within and partly from sources outside the PH –
Long Term Construction Projects i. If produced by the TP within and sold outside the PH;
Two Modes in recognizing the income: or
(1) Lump Sum Method – method of recognizing income in the year ii. If produced by the TP outside and sold within the PH.
when the Project has been completed. And will only be adopted by c. Purchase and Sale
the TP if the Project is accomplished within 1 Year. The income shall be treated as derived entirely from the
(2) Percentage of Completion Method – If a project will not be sources within the country in which the property was sold.
accomplished within 1 year. Income will be recognized based on Regardless of whether it was bought outside and sold within
the percentage of the completion of the project the PH or vice versa.

Suppose: (6) Sale of Real Property - where the real property is located
The total net income of a project is 1M.
1st year - 40% is completed (400k is recognized) Gross Income
2nd year – 80% is completed (400k is recognized)
3rd year – 100% is completed (200k is recognized)
Definition

21 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Section 32. Gross Income. – General Definition. - Except when otherwise If the additional benefit has been granted to rank and file employees, they
provided in this Title, gross income means all income derived from will not be considered as fringe benefits but they will be considered as
whatever source, including (but not limited to) the following items: part of their compensation which is subject to tax.
(1) Compensation for services in whatever form paid, including, but • If part of compensation, then it will be subject to withholding tax.
not limited to fees, salaries, wages, commissions, and similar items • If part of other benefits then if such amount did not exceed 90,000
(2) Gross income derived from the conduct of trade or business or the then it will not be subject to tax.
exercise of a profession;
(3) Gains derived from dealings in property; How to know if it is part of compensation or part of other
(4) Interests benefits?
(5) Rents • If it is a fixed amount and regularly given – Compensation
(6) Royalties • If it is not a fixed amount and not regularly given – Other
(7) Dividends Benefits
(8) Annuities
(9) Prizes and winnings Importance
(10) Pensions and Tax Treatments for these two are different:
(11) Partner's distributive share from the net income of the GPP (1) Other Benefits –Normal Tax
(2) Fringe Benefits – Fringe Benefit tax which is a Final Tax (FT)
Sub-Classifications of Gross Income • Once the tax had been remitted to the BIR, the TP liability is
(1) Compensation income already extinguished. Hence, it will be no longer added to
(2) Income from Business, Trade or Profession compensation subject to normal tax.
(3) Passive income (DRRIPPA)
(4) Income from Capital Dealings ER as Withholding Agent
Under present IRR, the ER is constituted as the withholding agent for the
Note: For individual TP, the tax treatment of each subclassification remittance of FBT. If not remitted, the EE and ER may be liable.
of gross income is different. (Schedular Tax Treatment)
Suppose:
Distinguish: Gross Income, Net Income, and A managerial EE receives 100k housing benefits every month. The ER
Taxable Income must remit the tax on the 100k.

Gross income – The total income of a taxpayer subject to tax. It includes Will the 100k be added to the salary of the EE?
the gains, profits, and income derived from whatever source, whether
legal or illegal. (Sec. 32A, NIRC) It does not include income excluded by No more. Because it is already subject to final tax
law, or which are exempt from income tax
What if it is given to a rank & file EE?
Net income – Means gross income less statutory deductions and
exemptions The 100k will be added as part of the compensation subject to normal
tax.
Taxable income – means the pertinent items of gross income specified
in the Tax Code, less the deductions and/or personal and additional FBT vis-à-vis CGT
exemptions, if any, authorized for such types of income by the Tax Code CGT is also a FT but no one will be constituted as a withholding agent
or other special laws [Sec. 31, NIRC]. It is synonymous to the term “net
income.” FBT Rate
Before TRAIN law= 32%
Sources of Income Subject to Tax Under TRAIN law = 35%

i. Compensation Income List of Fringe Benefits (HEVHIMTEL)

(1) Housing Expense
Compensation Income are all remunerations for services performed by (2) Personal Expense
an employee for his employer under an ER-EE relationship, unless (3) Vehicle Expense
excepted under the provisions of the NIRC are considered as (4) Household Expense
compensation income. (5) Interest Expense
(6) Membership Dues
Note: Under R.A. 8424 and the TRAIN law, the tax treatment of (7) Foreign Travel Expense
Compensation Income is the same. Compensation Income is still subject (8) Holiday Expense
to graduate tax rate, and the taxpayer cannot claim deductions for (9) Educational Assistance
compensation income. (10) Life Insurance

Minimum Wage Earners | Not Taxable CIR v. PAGCOR

GR: Compensation income including overtime pay, holiday pay, night
shift differential pay, and hazard pay, earned by minimum wage earners
who has no other returnable income are not taxable and not subject to
withholding tax on wages
XPN: If he receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of ₱90,000 [TRAIN law], taxable allowance, and other taxable
income other than the statutory minimum wage, holiday pay, overtime
pay, hazard pay and night shift differential pay
Employer’s Convenience Rule
Privileges granted to an employee which will redound to the benefit of
the employer shall not be subject to tax
ii. Fringe Benefits
Coverage
Managerial or Supervisory employees
In rel. to Rank and File EEs
2016
Fringe benefits and other benefits applies to Government EEs
Points to remember:
De Minimis – Exempt from Tax
• The first 90,000 in excess of the 13th month pay and other benefits
shall be considered as non-taxable.
• The excess thereof is taxable.
• Moreover, with respect to the excess – we should consider the EE if
he is a rank and file or in a managerial/supervisory position.
(a) Housing Expense
The ER will provide the EE a house, or will just provide the cash.
When will the housing benefit be exempted from tax?
(1) If it adjacent to the business premises or within 50 kms from the
company
(2) If the stay is temporary (which is 3 months or less)
(3) The housing benefit is given to AFP or
(4) If Employer Convenience Rule applies

22 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

These are expenses incurred by the managerial or supervisory

(b) Personal Expenses employees during. Obviously, this is for the benefit of the EE. Hence, it
It must be shown that the amount is not liquidated because once it is shall be subject to FBT.
liquidated with respect to the BTP of the ER, it will not be subject to tax.
(i) Educational Assistance (Bar)
GR: FBT
XPN: ECR GR: The cost of educational assistance whether granted to the EE or to its
dependents shall be subject to FBT.
(c) Vehicle Expense XPN:
If the ER granted a vehicle or car plan for personal benefit. (1) Educational Assistance granted to EEs – the cost will be exemp from
tax if the educational assistance is
Suppose: a. Directly related to ERs trade or business and
A medical representative was given by his company a car plan. b. There is a written contract indicating the EE’s obligation to
render future substantial service
Is it subject to tax? (2) Educational Assistance granted to Dependents
GR: It is taxable
Depends. Apply ER Convenience Rule. XPN: If the assistance is provided through a competitive scheme
under the scholarship program of the company. Such as obligations
or conditions to maintain the scholarship program.
Suppose:
At the end of the employment contract, the EE is given the option to
(j) Life Insurance
purchase the car at a minimal amount.
Premium payments paid by the ER for the benefit of the EE.
Will that scheme result to a taxable event on the part of the
Taxability
employee?
It depends on who the beneficiary is. If it is the EE/dependents, it is
subject to tax. If the EE is a managerial/supervisory, treat it as a Fringe
Yes, in so far as the decrease of the amount is concerned.
Benefit.

(d) Household Expense

iii. Income from Business, Trade or Profession
The expense must be for the usual household expenses, e.g., salary of
helpers & gardeners, garbage fees, etc.
Allowable Deduction
GR: Allowable deductions shall reduce taxable income.
(e) Interest Expense
XPN: It does not apply to compensation income.
If the actual rate of the loan extended by the ER is lower than the market
rate (not the legal rate)
Recognition of Income from BTP
• Market Rate – rate imposed within the same industry
How do we recognize the income, if the income is considered as income
• Fringe Benefit – interest forgone in the interest rate imposed on the from BTP?
loan (1) Cash Method – Income will be recognized once there is a collection
whether earned or not
Suppose: (2) Accrual Basis – Income shall be recognized once earned whether
A loan was extended to a managerial EE in the amount of 100,000. The collected or not
rate imposed to the loan is 4%.
Types of Enterprise
How much is the interest income subject to fringe benefit tax.? (1) Service Enterprise
TP are allowed to choose b/n Cash Method or Accrual Basis
The income subject to fringe benefit is equivalent to 2% of the 100,000. (2) Retail
The market or legal rate is 6% minus the actual rate which is 4%. Hence, TP shall adopt the Accrual Basis
the interest foregone is 2%. The 2% represents the interest income by (3) Manufacturing
the managerial or supervisory employee. TP shall adopt the Accrual Basis

(f) Membership Dues Lease | Security Deposit

Dues paid to social and athletic clubs, and other similar organizations. In a contract of lease, when the lessee will pay the rent. Notwithstanding
the fact that the period covered by the lease had not yet lapsed. The
If the ER paid the dues of the president in Baguio Country Club, it is payment is called security deposit.
considered as FBT Forfeiture Clause – one where in cases of pre-termination of the lease
period, the lessor shall forfeit the amount of security deposit. It shall be
Suppose: subject to tax because the income is already recognized.
The Company paid the IBP Dues Security Deposit – it cannot be considered as income.

Is it a taxable event? Suppose:

No. IBP is not a social/athletic club.
(g) Foreign Travel Expense
Only if the convention abroad is for the benefit of the EE, and not for the
benefit of the ER.
(1) Inland Travel Expenses – all exempt from tax if the receipts are
under the name of the ER
(2) Hotel Accommodation – the amount of $300 or less shall not be
subject to FBT. Any excess on top of $300/day will already be
subject to FBT.
(3) Cost of Economy and Business class tickets – It is not subject to FBT
but the cost of a first-class ticket shall be subject to tax only up to
30% of its amount. The remaining 70% shall be exempt from tax.
Atty. Tin owns an apartment, her lessees are Xymann, Jovs, Mich and JP.
The rent per month is 10,000 starting January 2020. Xymann never paid
from January up to October. JP paid on time. Mich already paid up to 2021
rent, she paid 240,000 for the whole 2 years of rent. Jovs paid only from
January up to June.
In case Atty. Tin would adopt cash method, how much should she
recognize as an income?
In Xymann’s case, no income will be recognized because under cash
method, income will only be recognized if there is collection. If its accrual
method, she will already recognize the income because under this
method, once the income has been earned, the she should now record the
income even if it is not yet collected. Same rule shall be followed in case
of Mich, Jovs and JP.

NOTE: Apply ECR, if need be. Note: In case of security deposits, the deposit shall not be recognized at
the time of collection because there is definite and unconditional
(h) Holiday Expense obligation to return. Hence, it cannot be considered as income. Now, what

23 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

if there is pre-termination and coupled with a forfeiture clause. Will there

be an income to be recognized? Yes. This is the time that the security
deposit will be recognized as an income but only when there is forfeiture
clause.
CIR vs. CA and ANSCOR
GR No. 108576 January 20, 1999
If its source is the original capital subscriptions upon establishment of the
corporation or from initial capital investment in an existing enterprise, its
redemption to the concurrent value of acquisition may not invite the
application of Sec. 83(b) under the 1939 Tax Code, as it is not income but
a mere return of capital. On the contrary, if the redeemed shares are from
stock dividend declarations other than as initial capital investment, the
proceeds of the redemption is additional wealth, for it is not merely a
return of capital but a gain thereon.
What if a RP is neither being used in business nor by any BOD and
SH?
It will be classified as CA.
Provided that TP will submit a certificate to the Punong Barangay or from
the administrator or the manager of the Condominium Corporation in
case of Condominium Units, that the property is not being used in
business.
What if a RP has been booked in the records of the Corporation?
OA. Unless it is proven that it is not being used in business.
(b) Types of Gains

iv. Income from Dealings in Property Ordinary Income vis-à-vis Capital Gain

(a) Distinguish Ordinary Asset and Capital Asset If the asset involved is classified as ordinary, the entire amount of the
gain from the transaction shall be included in the computation of gross
Types of Assets income [Sec 32(A)], and the entire amount of the loss shall be deductible
(1) Capital Asset (CA)-all assets other than ordinary assets from gross income.
(2) Ordinary Asset (OA)- enumeration under the Law [DRIPS]
a. Stocks in Trade If the asset involved is a capital asset, the rules on capital gains and losses
b. Inventoriable Property apply in the determination of the amount to be included in gross income
c. Property held for Sale
d. Real Property used in Business These rules do not apply to:
e. Depreciable Property in Business (1) Real Property with a CGT (Final Tax), or
(2) S/S of a DC with CGT (Final Tax)
Sale of Asset | Tax Implication
GR: Actual Gain vis-à-vis Presumed Gain
(1) Real Property
a. Ordinary Asset - – Normal Tax based on Net Income (NCIT or Presumed Gain: In the sale of real property located in the Philippines,
Normal Schedular Income Tax) classified as capital asset, the tax base is the gross selling price or fair
b. Capital Asset – 6% CGT based on GSP or MV whichever is market value, whichever is higher. The law presumes that the seller
higher makes a gain from such sale
• Never ever use Section 24D which is the 6% CGT with
respect to sale of Personal Property Thus, whether or not the seller makes a profit from the sale of real
(2) Personal Property property, he has to pay 6% capital gains tax.
a. Ordinary Asset–Normal Tax based on Net Income
b. Capital Asset –Normal Tax based on Net Income Actual Gain: The tax base in the sale of real property classified as an
ordinary asset is the actual gain.
XPN:
Sale of Shares of Stocks because the tax implication will depend if such Long Term Capital Gain vis-à-vis Short Term Capital Gain
stocks are listed or not listed.
(1) Listed – subject to 6/10 of 1% stock transfer/transaction tax based Long-term capital gain: Capital asset is held for more than 12 months
on the GSP before it is sold. Only 50% of the gain is recognized.
(2) Not listed:
a. Prior to TRAIN Law – It shall be subject to 5% CGT based on Short-term capital gain: Capital asset is held for 12 months or less,
the first 100,000 net gain. The excess shall be subject to10% 100% of the gain is subject to tax.
b. TRAIN Law – fixed at 15% FWT based on the net gain
Note: If the TP is a corporation, 100% of the gain is recognized regardless
Is the imposition of CGT better than the imposition of Normal Tax? of the holding period.
Not Necessary.
Net Capital Gain vis-à-vis Net Capital Loss
If I sell a property and incurred a loss, is the imposition of normal
tax better? Net Capital Gain: Excess of the gains over the losses on sales or exchange
Technically, no. Because it will likewise be subject to percentage tax or of capital assets during the taxable year
VAT. If a person sells a property in the ordinary course of business, it will
be subject to business tax (3% percentage tax and 12% VAT, based on Net Capital Loss: Excess of the losses over the gains on sales or
gross receipts/sales) and income tax. exchanges of capital assets during the taxable year.

RR 7-2003 (c) Special Rules on Capital Transaction

If a TP is engaged in buy and sell of RP, or engaged RP management, all Application

the RP being held by this corporation shall be considered as an OA Only applied in RP classified as OA

If TP is not engaged in buy and sell of RP or management thereof:
(1) If used in the business, the RP or Asset shall be considered as OA
(2) If a person sold 6 RP during the same year, then the TP is presumed
to be engaged in the business of real estate development. Hence,
classified as OA
(3) If the Property has been used for the benefit of one of the owners or
one of the members of the board or SH, it will be treated as used in
business. Hence, it will be classified as OA
(4) If a RP has been already been classified as OA, and later been
abandoned or idle, it will still be considered as OA, for being
previously been classified as OA
(1) Loss Limitation Rule – provides that Capital Losses shall be
deducted only up to the extent of Capital Gains.
• Meaning, Capital Gains cannot be deducted from Ordinary
Losses but, Ordinary Losses can be deducted from Capital
Gains
(2) Holding Period Rule – The percentage of gain or loss that shall be
recognized by the TP shall depend on the period within which the
TP held a particular asset.
• 100% of the gains or loss shall be recognized if the asset was
held for 12 months or less.

24 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

• If the assets shall be held for more than 1 year, then only 50% Karlito, a Filipino businessman, is engaged in the business of metal
of the loss or gain shall be recognized fabrication and repair of LPG cylinder tanks. He conducts business under
• An asset held for 12 months or less, the sale shall result to a the name and style of "Karlito's Enterprises," a single proprietorship.
Short-Term Capital Loss or Gain. On the other hand, assets Started only five (5) years ago, the business has grown so enormously
held for more than 1 year, the sale shall result to Long Term that Karlito decided to incorporate it by transferring all the assets of the
capital Loss or Long-Term Capital Gain, for in which only 50% business, particularly the inventory of goods on hand, machineries and
of the gain or loss shall be recognize equipment, supplies, parts, raw materials, office furniture and
(3) Net Capital Loss Carry Over (NCLCO) – is one where the excess of furnishings, delivery trucks and other vehicles, buildings, and tools to the
CL over CG shall be carried over to the succeeding year (singular) new corporation, Karlito's Enterprises, Inc., in exchange for 100% of the
in an amount not exceeding the Taxable Income earned during the capital stock of the new corporation, the stock subscription to which shall
year that the loss was sustained. be deemed fully paid in the form of the assets transferred to the
corporation by Karlito.
NCLCO v. NOCLO
NCLCO NOLCO As a result, Karlito's Enterprises, the sole proprietorship, ceased to do
Period of Carry business and applied for cancellation of its BIR Certificate of Registration.
1 year 3 years The BIR, however, assessed Karlito VAT on account of the cessation of
Over
The amount deductible business based on the current market price of the assets transferred to
Limitation on must not exceed the Karlito's Enterprises, Inc.
No
the Deductible Taxable Income earned
Limitation a. Is the transfer subject to VAT? (2.5%)
Amount during the year that the loss
was sustained b. Is the transfer subject to income tax? (2.5%)

Note: Just remember the Rules, and not the computation. However, v. Passive Investment Income
they would not state if it is a ST or LT Transaction. So, determine
this during the Bar/Exams. Tax Rate | Passive Income (Subject to FWT as a General Rule)
DRIP (Dividends, Royalties, Interest, Prizes and Winnings)
What if a Corporate TP incur Loss for a Sale of a Vehicle (1) Dividends
It cannot carry over. Because it cannot apply to Corporation. a. RC, NRC, NRA -10% FWT
b. RAEBT– 20% FWT
What if the Corporate TP shall incurred a loss from a c. NRAEBT– 25% FWT
transaction dealing with a CA that has been held for more than (2) Royalties
12 months? Will the Crop TP recognize the entire? GR: 20% FWT
Yes. Because Holding Period Rule is not applicable to Corp TP XPN: LBM 10%
(3) Interest
(d) Tax Free Exchange a. Bank Deposits and Deposit Substitutes – 20% FWT
b. Foreign Currency Deposits
One where there is a transfer of property in exchange for S/S where the i. RC – 15% FWT
transferor, either acting alone or together with others, but not exceeding ii. NRC – Exempt from Tax
4 persons, will obtain control over the corporation. c. Other – Normal Tax
(4) Prize and Winnings
Elements a. Prizes
(1) The transferee must be a Corporation i. 10k or less – Normal Tax
(2) The transfer of the Shares must be an exchange of a property or ii. More than 10k – 20% FWT
properties b. Winnings – 20% FWT regardless of amount
(3) The transferor must be a person (natural or juridical) either acting c. PCSO/Lotto
alone or together with others, not exceeding 4; and i. 10k or less – Exempt
(4) These persons, must control or obtain control over the transferee ii. More than 10k – 20% FWT
Corporation
• Control: Having at least 51% of Ownership over the (a) Interest
Corporation
(1) Bank Deposits/Deposit Substitute
Note: The exemption is not automatic. There is a requirement under
existing RR, the TP must request for a Confirmatory Ruling which indeed GR: The interest is subject to 20% FWT which is withheld by the
the Property is exempt under Section 40(c). Bank.
XPN: Interest from:
However, what is important in this principle is that the elements a. Long Term Deposits (holding period of at least 5 years) – Tax
mentioned above should be established. The confirmatory ruling issued Exempt
by the CIR is only for the sake of formalities but not necessary for the If the period has been terminated i.e., pre-termination:
establishment of the exemption from tax. i. 4 to less than 5 years –5%
ii. 3 to less than 4 years –12%
CIR v. Filinvest Development Corporation iii. Less than 3 years –20%
Landmark Case Sec. 40(C) b. Foreign Currency Deposits System (FCDS)
i. TRAIN law prior: 7.5% FWT
FDC and FAI executed a Deed of Exchange with FLI ii. Under the TRAIN law: 15% FWT
FDC and FAI will transfer parcels of land to FLI.
FLI will issue Shares of Stocks in favor of FDC and FAI Note: The tax implication under FCDS only applies to
residents of the PH. For RFC, it is still 7.5%.
Is the transaction considered as tax free exchange?
(2) Other Loan Transactions - subject to Normal Tax based on the net
The ruling reiterated the elements of Tax-Free Exchange. The SC had income
considered the interest of FDC over FLI after the transfer which is 61%
and the interest of FDC over FAI. FDC owned FAI. FAI owned FLI after the Suppose:
exchange. Hence, there is still the increase of ownership of FDC over FAI. Mr. A obtained a loan from Mr. B. The loan is 1 million payable in a year
which will bear an interest of 10% per annum.
However, notwithstanding that fact, even if there is still a reduce interest,
there is still control over the transferee after the exchange. After one year, how much is the income and what is the tax
implication of the income?
2018 Bar

25 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

The payment of the 1 million is not subject to tax as this is only a return
of capital. The income is only 100,000 which is equivalent of the 10%
interest of the loan which shall be subject to normal tax based on net
income.
Suppose:
Mr. A deposited 1 million to a bank and it earned 1% per annum. The
interest earned is 10,000 per annum.
What is the tax implication?
The interest earned is subject to 20% FWT.
Suppose:
Z went to the bank and deposited 100,000 in a time deposit account with
a holding period of 6 months. Z forgot about this deposit. After 6 years,
she remembered her deposit. Z’s deposit earned interest already.
Will the interest income be exempt from tax?
No. The holding period based on the contract of time deposit is only 6
months. In order for it to be exempt from tax as a long-term deposit, the
contract should state that the holding period is at least 5 years or more.
(b) Dividend
Definition
Income received by a SH as his share from the profits earned by the
corporation
Consider the elements of taxability. The entire 500k will not be subject to
tax. A portion of the 500k represents a return of capital and a return on
capital. The return of capital is 100K, this will not be subject to income tax
because this is a capital and a capital shall be subjected to an income tax.
The remaining 400k of the 500k distributed liquidating dividend will be
the portion to be subjected to income tax.
Note: The return of capital cannot be taxed. If the liquidating dividend
represent an amount pertaining to an amount of return of capital, it shall
not be subject to tax, but any excess there of which represent income shall
be taxable.
(c) Stock Dividends
GR: It is not subject to tax since there is no income earned from the
declaration of stock dividends. In such case, there is no flow of wealth.
Suppose:
The company declared 10,000 S/S distributed as follows:
A has 2,000 (25%) A shall receive 2,500 A has 4,500 (25%)
B has 2,000 (25%) B shall receive 2,500 B has 4,500 (25%)
C has 1,000 (12.5%) C shall receive 1,250 C has 2,250 (12.5%)
D has 1,000 (12.5%) D shall receive 1,250 D has 2,250 (12.5%)
E has 2,000 (25%) E shall receive 2,500 E has 4,500 (25%)
Total 8,000 (100%) Total is 10,000 Total 18,000
(100%)
In this case, the SHs did not increase their ‘share’ in the Company. Hence,
there is no flow of wealth.

Importance of Declaration XPN:

For there to be dividend income, the corporation should declare such in (1) Option to Choose
favor of the SH.
The corporation allows the SH to choose between Cash, Property or
Two important dates: Stock Dividend. Some of the SH actually exercised their right to
(1) Date of Declaration – date when the corporation decided to choose Cash or Property Dividend
distribute
(2) Date of Distribution- actually distributed the dividends Elements
a. The Corporation will declare/distribute a stock
b. Some of the SH has chosen cash or property dividend
Suppose:
Corporation X declared ₱10k each per SH on January 05, 2020. Dividend
income shall be distributed on March 13, 2020. Example:
If A or B shall choose cash/property dividend, the shares of stocks
When shall the tax accrue? of B, C and D will increase. Hence, there is already a gain or flow of
wealth.
On the date of Declaration which is January 05, 2020.
(2) Dividend Equivalents
Note: The basic rule of recognition of income shall come into play. The
rule is, tax will accrue when the income has been already been earned, so Redemption of Shares – an act whereby the corporation will
in the case, when did the income accrue? When the corporation declared reacquire its shares of stocks.
the dividend.
Suppose:
Type of Dividends Assume that there are 6 Incorporators/SHs in Monte Corp. If they
(1) Cash return their shares to Monte Corp., it will be called treasury shares.
(2) Property In turn, Monte Corp. will give the incorporator, cash.
(3) Liquidating
Shall it be subject to tax on the part of the Stockholder?
(4) Stock

NO. It is just a Return of Capital, therefore, it is not subject to tax.

i. Cash Dividend
Face value of the cash
Note: Corporations are obliged to withhold 10% FWT in case of
ii. Property Dividend dividend income.
Based on FMV
Elements | Dividend Equivalents
iii. Liquidating Dividend a. There is Redemption or Cancellation of shares
Distributed to the SH at the time of the dissolution of the Corporation. b. The transaction involves Stock Dividends
Dissolution of a corporation is when the corporation had already ceased c. The Time and Manner of the transaction makes it essentially
its business equivalent to a distribution of taxable dividend. (Question of
Fact)
Suppose:
Note: The time and the manner of the transaction will be a case-to-
Tin bought 100k shares of stock from Pangmayaman Corporation, the
case basis. However, in the CIR v. ANSCOR, the SC held that the
corporation dissolved its corporate fares. The company distributed to Tin
500k liquidating dividends. purpose of redemption is not material. What is material is the
declaration of the stock dividends. In CIR v. ANSCOR, the TP argued
Will the 500k liquidating dividend be considered as taxable that the purpose of the redemption is for the Filipinization of the
income? Corporation which would reason out its exemption. The SC did not
consider such argument. In its dividend declaration, the
redemption refers to a total 82,000 shares, 25,000 of which
represents the original shares, which is the only portion that

26 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

represents the return of capital, the excess shall be treated as Stock
Dividends.
Dividends derived from Corporations
Types of Corporations
(1) Domestic Corporation (DC) - incorporated and registered in the
Philippines
(2) Foreign Corporation (FC) - entity which is established or
incorporated under the laws of the State other than the Philippines
a. Resident Foreign Corporation (RFC) – a foreign corporation
engaged in business in the Philippines
b. Non-Resident Foreign Corporation (NRFC) - a foreign
corporation not engaged in business in the Philippines
(2) Spread Out Method – the lessor will recognize the value of the
improvement at the end of the least term which will be spread out
during the entire period of the lease
Tax rate | Rental Income
5% CWT
Suppose:
The value of the improvement is 10 million. The estimated useful life of
the improvement is 10 years. The lease period is 5 years. At the end of the
5-year period, the improvement will now be owned by the lessor. The
value of the improvement upon completion is 10 million
At the end of the lease period, how much is the income?

Tax Rates Outright method – The value shall be considered is the value upon
If the issuer is a: completion which is 10M
(1) DC issued to:
a. RC – 10% FWT Spread out method – The income shall be 5 million because the value of
b. NRC – 10% FWT the property decreases by 1 million per year. Hence, at the end of the least
c. RA – 10% FWT term the value is 5M. This will be spread out.
d. NRAETB – 20% FWT
e. NRANTB – 25% FT based on his gross income There is no difference b/n the two methods
(2) RFC issued to: In outright method, the income is 10 million, but since the owner already
a. RC – 10% FWT recognizes the income from the date of completion of the improvement,
b. NRC – 10% FWT (those sourced from within) the owner can have depreciation expenses. The depreciation expense is
c. RA – 10% FWT (those sourced from within) 1 million per year. So, at the end of the lease period, the value of the
d. NRAETB – 20% FWT (those sourced from within) property is only 5 million. So, the income in the outright and spread out
e. NRANTB – 25% FT based on his gross income (those sourced are the same. They both have 5 million income.
from within)
(3) NRFC issued to: vi. Annuities and Proceeds from Life Insurance or Other Types of
a. RC – declare it as part of his gross income subject to normal Insurance
tax
b. NRC – not subject to tax It refers to periodic installment payments of income or pension by
c. RA – not subject to tax insurance companies during the life of a person or for a guaranteed fixed
d. NRAETB – not subject to tax period of time, whichever is longer, in consideration of capital paid by
e. NRANTB – not subject to tax him. It is paid annually, monthly, or periodically, computed upon the
amount paid yearly, but necessarily for life.
Inter-Corporate Dividend Principle | DC to DC/RFC, no Tax
If a DC declares dividend in favor of another DC or a RFC, the dividend Note: see Exclusions from Gross Income for further discussions
income shall not be subject to tax
(1) DC to DC –Not Taxable vii. Prizes and Awards
(2) DC to RFC –Not Taxable
(3) DC to NRFC – 30% FWT unless Tax Sparing Rule applies, then the A prize is a reward for a contest or a competition. Such payment
tax rate shall be 15% FWT constitutes gain derived from labor.

Tax Sparing Rule Note: see Exclusions from Gross Income for further discussions
A lower 15% FWT will be imposed on dividends received by an
NRFC if the country in which the NRFC is domiciled allows a tax viii. Pension, Retirement Benefit, or Separation Pay
credit against the tax due from the NRFC representing taxes
deemed to have been paid in the Philippines (PH) equivalent to A stated allowance paid regularly to a person on his retirement or to his
15%. dependents on his death, in consideration of past services, meritorious
work, age, loss or injury.
(1) RFC to DC – Taxable
(2) RFC to RFC –Taxable (income source from within) Note: see Exclusions from Gross Income for further discussions
(3) RFC to NRFC –Taxable (income source from within)
Exclusions
(4) NRFC to DC –Taxable
(5) NRFC to RFC –Not taxable
i. Rationale
(6) NRFC to NRFC –Not taxable

The term “exclusions” refers to items that are not included in the
(d) Royalty Income
determination of gross income because:
(1) They represent return of capital or are not income, gain or profit
GR: It shall be subject to 20% FWT.
(2) They are subject to another kind of internal revenue tax
XPN: 10% FWT shall be imposed in cases of Royalties arising from
(3) hey are income, gain or profit expressly exempt from income tax
literary works, books or musical compositions (LBM)
under the Constitution, tax treaty, Tax Code, or a general or special law
(e) Rental Income
ii. Taxpayers Who May Avail
Leasehold Improvement – improvements constructed by the Lessee
EXCLUSION TAXPAYER
which will belong of the Lessor at the end of the lease period. It shall form
Return of capital All TP since there is no income
part of the rental income.
GR: All TP
Already subject to another
Practical use: Lessors would typically include this provision because they XPN: Unless provided that such
internal revenue tax
will gain from it. income is to be included
Express Exclusion As expressly provided
Value of Rental income
(1) Outright Method – method whereby the lessor recognizes the iii. Distinguish: Exclusions, Deductions and Tax Credit
income during the year of completion and the taxable base is
equivalent of the FMV of the improvement upon completion EXCLUSION DEDUCTION TAX CREDIT

27 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Refer to flow of wealth to the LIFE INSURANCE PROCEEDS

taxpayer which are not
treated as part of gross The amounts Proceeds (not the premium payments)
income for purposes of which the law The proceeds received by the beneficiary shall not be considered as
computing the taxpayer’s allows to be taxable income whether it is received by the ER or the EE/heirs/family.
taxable income, due to the subtracted from
following reasons: (1) it is gross income in Amounts The proceeds of life insurance policies paid to the heirs or beneficiaries
exempted by the order to arrive at subtracted upon the death of the insured, whether in a single sum or otherwise shall
Constitution or a statute; or net income from the not be included from gross income (Sec. 32(b)(1))
(2) it does not come within computed tax
the definition of income. in order to Life Proceeds vis-à-vis Estate Tax
Deductions arrive at taxes Sec. 85 (E) Proceeds of Life Insurance. - To the extent of the amount receivable by the
Exclusions pertain to the estate of the deceased, his executor, or administrator, as insurance under policies taken
pertain to the payable.
computation of gross out by the decedent upon his own life, irrespective of whether or not the insured retained
computation of
income the power of revocation, or to the extent of the amount receivable by any beneficiary
net income
designated in the policy of insurance, except when it is expressly stipulated that
Exclusions are something Deductions are the designation of the beneficiary is irrevocable.
received or earned by the something spent
taxpayer which do not form or paid in earning
Will the proceeds be considered as part of the gross estate subject
part of gross income gross income
to the estate tax?

iv. Exclusions Under the Constitution Depends on the designation of the beneficiary
(1) Irrevocable – No, since the insured no longer has control as to the
Exclusion under the Constitution designation of the beneficiary
(1) Income derived by the government or its political subdivisions (2) Revocable
from the exercise of any essential governmental function GR: Include as part of the gross estate subject to tax
(Instrumentalities) XPN:
(2) All assets and revenues of a NSNP private EI used ADE for private a. The designated beneficiary is the estate, executor or
educational purposes shall be exempt from taxation. administrator; or
b. The right to revoke has not been exercised during the term of
v. Exclusions Under the Tax Code [Sec. 32(b), NIRC] the policy

(a) Proceeds from life insurance taken out by the insured upon
his own life
Sec. 32 (b) – The following items shall not be included in gross income and shall be
exempt from taxation under this title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if
such amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income
(b) Amount of Premium Return
Sec. 32 (b) – The following items shall not be included in gross income and shall be
exempt from taxation under this title:
(2) Amount Received by Insured as Return of Premium. - The amount received by the
insured, as a return of premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term or at the maturity of the term mentioned in
the contract or upon surrender of the contract.

Note: Merely return of Capital

GR: Proceeds from life insurance are exempt from tax
XPN: Interest thereon (c) Gifts, Bequests or Devises

PREMIUM PAYMENTS
Rule | Excluded if the ER is the Beneficiary
Premium payments are excluded from the gross income of the EE when
the ER insures the life of his EE and the beneficiary designated is the ER
Sec. 32 (b) – The following items shall not be included in gross income and shall be
exempt from taxation under this title:
(3) Gifts, Bequests, and Devises._ The value of property acquired by gift, bequest, devise,
or descent: Provided, however, That income from such property, as well as gift, bequest,
devise or descent of income from any property, in cases of transfers of divided interest,
shall be included in gross income.

Suppose:
While there is a flow of wealth on the part of the recipient, gifts, bequests
An ER takes a life insurance policy on the life of his EE.
and devises are still not considered as part of the gross income because it
is specifically excluded by law.
Are the premium payments made by the ER a taxable income on the
part of the EE?
In rel. to Donor’s Tax or Estate Tax
Nevertheless, the act of transferring the property gratuitously to another
Depends:
individual is subject to donor’s tax or estate tax, as the case may be.
(1) Beneficiary is EE/his heirs/Family – Part of taxable income of EE
The proceeds will redound to his benefit. Hence, the premium payments
Political Contributions
will be considered as part of his gross income.
Political Contributions are considered as gifts or donations since all the
(2) Beneficiary is ER – Not part of taxable income of EE. There is no
elements of a donation are present.
benefit which will redound to the benefit of the EE

Is it subject to donor’s tax?

DEDUCTIONS
Suppose:
Given the same set of facts as above.
Will the employer treat the premium payments as deductions?
Depends
(1) Beneficiary is EE/his heirs/Family – ER may treat it as deductions.
(2) Beneficiary is ER – ER cannot treat is as deduction, since it is not in
relation to his business, it will be considered as a ROI
Note: If taxable income on the EE, it will be considered as deductible
expense on the ER. If it is not considered as taxable income on the part of
the EE, it will not be allowed as deduction on the part of the ER.
No. Any provision of law to the contrary notwithstanding any
contribution in cash or in kind to any candidate or political party or
coalition of parties for campaign purposes, duly reported
(reportorial requirements) to the COMELEC shall not be subject to
the payment of any gift tax. (OEC).
(d) Compensation for Injuries or Sickness
Sec. 32 (b) – The following items shall not be included in gross income and shall be
exempt from taxation under this title:
(4) Compensation for Injuries or Sickness. – amounts received, through Accident or
Health Insurance or under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages received, whether by suit
or agreement, on account of such injuries or sickness.
Coverage | Personal Injury
All types of compensation for personal injury.

28 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

(1) It is not limited to physical injury, but covers all types of injuries. (4) Only when there is no RPBP
(2) It also includes damages received through a court judgment or
through a compromise agreement Note: If the problem is silent with respect of the type of situation, always
(3) It likewise includes compensation from ECC. assume that it is with a RPBP.

Examples Suppose:
a. Actual Damages Tonyo is the president of X corporation. In his last day of employment,
b. Exemplary Tonyo received a Honda CRV with a FMV of ₱2M. This car was given in
c. Liquidated gratitude to Tonyo’s services for more than 15 years.
d. Compensation for loss of life
How would you treat the Honda CRV?
Excluded | Compensation for Loss of Profit
This is no longer considered as personal injury. All amounts given pursuant to er-ee relationship shall be considered as
compensation income. since Tonyo received it during his employment
(e) Income Exempt Under Treaty and not after, it is considered as compensation income.

(5) Income Exempt under Treaty.-Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the Philippines.
CBK Power Company Limited v. CIR
G.R. Nos. 193383-84, January 14, 2015
How will you subclassify the compensation income?
It will be considered as other benefits. It is not in the nature of the
retirement pay because the nature of the retirement pay must be explicit
as provided for in the Company policy, handbook or CBA.

CBK Power borrowed money from Industrial Bank of Japan, Fortis-
Netherlands, Raiffesen Bank, Fortis-Belgium, and Mizuho Bank for which
it remitted interest payments from May 2001 to May 2003. It withheld
around 15-20% final taxes from said payments. However, according to
CBK Power, under the relevant tax treatiesbetween the Philippines and
the respective countries in which each of the banks is a resident, the
interest income derived by the aforementioned banks are subject only to
a preferential tax rate of 10%. Accordingly, CBK filed for refund. The CTA
ruled that CBK Power is not entitled to the refund because it failed to
comply with RMO 1-2000 requiring an application with ITAD at least 15
days before the transaction.
SEPARATION PAY
Sec. 32 (B) (6) (b) Any amount received by an official or employee or by his
heirs from the employer as a consequence of separation of such official or
employee from the service of the employer because of death, sickness or
other physical disability or for any cause beyond the control of the said
official or employee.
Always determine if separation is voluntary or involuntary
(1) Voluntary – Subject to tax
(2) Involuntary – not subject to tax

Is the CTA correct?

Separation due to authorized cause – Involuntary, not subject to tax
Separation due to just cause –voluntary, subject to tax
No. The recent case of Deutsche Bank AG Manila Branch v. Commissioner
Resignation –voluntary, subject to tax
of Internal Revenue (Deutsche Bank) emphasized that the obligation to
comply with a tax treaty must take precedence over the objective of RMO
(g) Miscellaneous Items
No. 1- 2000.
13TH MONTH PAY AND OTHER BENEFITS
In Deutsche Bank, the Court categorically held that the BIR should not
impose additional requirements that would negate the availment of the
Section 32 (B)(7)(e) 13th Month Pay and Other Benefits. - Gross benefits received by
reliefs provided for under international agreements, especially since said officials and employees of public and private entities: Provided, however, That the total
tax treaties do not provide for any prerequisite at all for the availment of exclusion under this subparagraph shall not exceed Thirty thousand pesos (₱80,000)
the benefits under said agreements
Note: TRAIN law – 90,000
(f) Retirement Benefits, Pensions, Gratuities, etc.
Will the 13thmonth pay and other benefits be subject to tax?
RETIREMENT BENEFITS GR: Exempt from tax
XPN: The excess of 90k shall be subject to tax.
These are: (1) In rel. to managerial/supervisory EEs
• Retirement benefits under RA 7641, RA 4917, and Section 60(B) of the Subject to FBT because the enumeration under Section 33, NIRC is
NIRC not exclusive, as denominated by the phrase ‘such as, but not
• Terminal pay limited to…’ therefore, the 13th month pay may be considered as
• Retirement Benefits from foreign government agencies fringe benefit on the part of the managerial EE.
• Veterans benefits (2) In rel. to rank and file EEs
• Benefits under the Social Security Act Subject to normal tax
• GSIS benefits
Suppose:
Retirement Pay NC Corp gave ₱2,000 rice subsidy in favor of its managerial/supervisory
GR: Not taxable and rank and file employees.
XPN:
(1) Retirement benefits received under RA 7641(The Retirement Pay Will the rice subsidy be subject to FBT/normal tax in favor of the
Law) managerial/rank and file EE?
(2) Under a Reasonable Private Benefit Plan (RPBP)
No. The de minimis benefit applies to both managerial and rank and file
Requisites | RPBP employees. Since the amount does not exceed the threshold amount
(1) Rendered at least 10 years for the same ER provided by law, it is not subject to tax.
(2) Must be at least 50 years old
(3) Retiring EE shall not have previously availed of the privilege under
Suppose:
a retirement benefit plan of the same or another ER
Courtesy discounts have been granted in favor of both
(4) Plan must be reasonable
managerial/supervisory and rank and file employees. The courtesy
(5) Plan must be approved by BIR
discount is very trivial/small in amount.
Requisites | RA 7641
Can it be considered as a de minimis benefit?
(1) Rendered at least 5 years for the same ER continuously
(2) Must be at least 60 years old but not more than 65
(3) Availed of only once

29 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

NO. The enumeration of de minimis benefits under the RR are exclusive.

Since courtesy discounts are not included in the list of de minimis benefit,
it cannot be considered as a de minimis benefit
What is the tax implication of the courtesy discount?
For managerial/supervisory EEs – If the courtesy discount along with the
13th month pay and other benefits do not exceed 90k, it will be exempt
from tax. The excess of 90k, if any, shall be subject to FBT
For rank-and-file EEs – if the courtesy discount along with the 13th
month pay and other benefits do not exceed 90k, it will be exempt from
tax. The excess of 90k, if any, shall be subject to normal tax
SSS, GSIS, PAG-IBIG and PHILHEALTH CONTRIBUTIONS including
UNION DUES
Mandatory Contributions
The amount to be excluded from the gross income shall be equivalent
only to the amount of mandatory contribution.
Suppose:
A contributes ₱1,000 per month to PAG-IBIG, the mandatory
contribution is only ₱100 per month.
How much shall be excluded from the gross income?
Only 100, the amount of mandatory contribution shall be excluded from
the gross income
GAINS FROM SALE OF BONDS/DEBENTURES
Note: This is already removed under the TRAIN law. However, the BIR
issued a RR stating that the gain from the sale of bonds shall still be
excluded from gross income provided the holding period is more than 5
years.
Rule
If the holding period of the bond is more than 5 years, the gains arising
from the sale of the bond shall be excluded from gross income.
(1) Gains from bonds/debentures – more than 5 years.
(2) Long-term Deposits – at least 5 years
OTHER EXCLUSIONS
General Rules
(1) Deductions must be paid or incurred in connection with BTP
(2) Deductions must be supported by adequate receipts or invoices
(except OSD)
Nature of Deductions
Deductions are mere privileges given by the State in order to reduce the
amount of tax liability. Consequently, the state can dispense the grant of
such deductions.
Concept of Return of Capital
Income tax is levied by law only on income; hence, the amount
representing return of capital should be deducted from proceeds from
sales of assets and should not be subject to income tax
Can the State dispense with the deductions of Cost of Sales with
respect to Income Tax?
No. Because of the principle that income tax cannot be imposed on
Capital, because it is just a return of capital.
Deductions v. Cost
Deduction– It does not represent Capital
Cost – It represents the cost of the Capital
Note: The 20% senior citizen discount is deemed as just compensation.
It is a tax deduction.
Costs of goods
Costs of goods purchased for resale, with proper adjustment for opening
and closing inventories, are deducted from gross sales in computing
gross income
Sale of inventory of goods by manufacturers and dealers of
properties
In sales of goods representing inventory, the amount received by the
seller consists of return of capital and gain from sale of goods or
properties. That portion of the receipt representing return of capital is
not subject to income tax. Accordingly, cost of goods manufactured and
sold (in the case of manufacturers) and cost of sales (in the case of
dealers) is deducted from gross sales and is reflected above the gross
income line in a profit and loss statement

Section 32 (B)(7)(a) Income Derived by Foreign Government. - Income derived from
investments in the Philippines in loans, stocks, bonds or other domestic securities, or
from interest on deposits in banks in the Philippines by (i) foreign governments, (ii)
financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial institutions established by
foreign governments.
Sale of stock in trade by a real estate dealer and dealer in securities
Real estate dealers and dealers in securities are ordinarily not allowed to
compute the amount representing return of capital through cost of sales.
Rather they are required to deduct the total cost specifically identifiable
to the real property or shares of stock sold or exchanged.

Sale of services
Note: This is pursuant to the principle of International Comity; See BDO
Their entire gross receipts are treated as part of gross income.
v. CIR

Section 32 (B)(7)(b) Income Derived by the Government or its Political

Distinguish: Itemized Deductions and Optional
Subdivisions. -Income derived from any public utility or from the exercise of any Standard Deductions
essential governmental function accruing to the Government of the Philippines or to
any political subdivision thereof. Types of Deductions
(1) Itemized Deductions
Note: Because these are inherently exempt from tax. Available to all kinds of TP engaged in BTP in the PH
(2) Optional Standard Deduction
Section 32 (B)(7)(c) Prizes and Awards. - Prizes and awards made primarily in To individual TP deriving business, professional, capital gains and
recognition of religious, charitable, scientific, educational, artistic, literary, or civic passive income not subject to final tax, or other income
achievement but only if:
(3) Optional Standard Deduction
(i) The recipient was selected without any action on his part to enter the contest or
Available to corporations
proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to (4) Special Deductions
receiving the prize or award. Sections 37 (Insurance Companies) and 38 (Wash Sale) of the
NIRC, and in special laws like the BOI law
Note: The recipient was selected without taking any action on his part
and must not be required to render future service. OPTIONAL
ITEMIZED DEDUCTION STANDARD
Section 32 (B)(7)(h) Gains from Redemption of Shares in Mutual Fund. - Gains DEDUCTION
realized by the investor upon redemption of shares of stock in a mutual fund company Based on a theoretical
as defined in Section 22 (BB) of this Code. amount
Based on actual amount of
Amount (1) 40% of the Gross
expenditure
Note: This particular exclusion [under Section 32 (B)(7)(h)] was already Receipts in cases
removed by the TRAIN law!!! of individual TP or

Deductions

30 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

(2) 40% of the Gross No, because it is not related to the business of the TP. It must be connected
Income in cases of with the business or trade of the TP. In such particular case, the loan
corporate TP. extended to the relative is considered as a personal loan.
Necessary
Not necessary
Diligent Efforts e.g., Demand Letters | Necessary
Since, there should be a The TP must have exerted diligent efforts in order to collect the
Necessity Since it is merely
substantial compliance with obligation. That will be considered compliant with the element that the
of Official theoretical, there is no
Receipts
the requirement under the claim must be actually ascertain to be worthless. For the A/R to be
need to substantiate it
law. Meaning, the expenses written off from the books, the TP must have sent demand letters to the
through official
must be duly supported by Debtor and there was no payment.
receipts
Official Receipts.
ii. Interest Expense
Suppose:
Dr. Strange earned 1,000,000 in gross receipts. He incurred an expense Requisites of Deductibility
in the amount of 560,000. Only 320,000 were duly supported by Official (1) The interest must be stipulated in writing
Receipts. (2) Must have accrued in relation to the BTP of the TP
(3) The interest expense must have been paid or must have accrued
What is the best way for Dr. Strange to maximize his expenses? during the taxable year
(4) The interest expense must not arise between related TP
Adopt OSD, which is 40% of the Gross Sales or Receipts which is
equivalent to 400,000. Still greater than 320,000 which were duly Note: This requisite also exist in bad debt expense. Hence, we need
supported by OR. Hence, only such amount shall be considered. to know who are related TP.

Related TP
Suppose:
a. Between members of the family i.e., spouse, descendants,
A Corporation earned 1M gross receipts and incurred an expense (Cost
ascendants, and/or siblings.
of Sales) of 400,000 and incurred allowable deduction in the amount of
b. Between an individual and a corporation where more than
40,000. Which would amount to a net income of 560,000.
50% of the OCS is owned by the said individual
c. If the transaction between 2 corporations where more than
What is the best method?
50% of the OCS of each of which is owned by or for the same
individual
The better way to maximize his expenses is to adopt OSD. In cases of
d. Between the grantor the trust and the fiduciary of the same
corporate TP, the corporation is allowed to deduct cost of sales. Hence,
trust
the cost of sale which is 400,000 minus 1 million is equal to 600,000.
e. Between a fiduciary of a trust and a fiduciary of another trust
Thus, the 40% of 600,000 is 240,000. Compare to itemized deductions,
where the grantor of both trusts is the same individual
the deduction is only 960,000 which is the amount of the allowable
f. Between a fiduciary of the trust and a beneficiary of such trust
deductions of 40,000 minus 1 million. Therefore, OSD is better to
maximize his expenses.
Stipulated in Writing
It is required under the NCC. A provisional interest shall be considered
Itemized Deduction (Requisites for void is such stipulation is not in writing.
Deductibility)
How much is deductible?
Itemized Deductions (BITE DeDe Loss CPR) GR: Deductible in full
• Bad Debts XPN: If the TP earns interest income subject to FWT during the same
• Interest taxable year when the interest expense incurred. (Tax Arbitrage Scheme)
• Taxes
• Expenses Tax Arbitrage Scheme
• Depreciation
• Depletion of oil and gas wells and mines In the event that the TP earns interest income subject to 20% FWT, there
• Charitable and other contributions shall be a tax differential equivalent to 30% of the interest income
• Research and Development
Tax Differential – this is the deductible amount from the Interest
• Pension trusts
Expense. Meaning the interest expense shall be reduced by the tax
differential of 30% of the interest income.
i. Bad Debts

Arbitrage – a term in a stock market, where there is simultaneous

Requisites of Deductibility
purchase and sale of a stock in different markets in order to derive profits
(1) There must be a valid and subsisting claim
arising from varying prices included in markets.
(2) It must be connected with the BTP of the TP
(3) The claim is not b/n related TP
Tax Arbitrage Scheme - A loan transaction has been used in order to
(4) The claim must be actually ascertained to be worthless
derive a tax benefit from the scheme of converting the money in one
(5) It must have been written off the taxable year
market to another market in order to have a tax saving

Suppose:
Suppose:
The obligation to pay had prescribed.
I obtained a loan in the amount of 1M subject to an interest rate of 10%
per annum. During the taxable year, I invested it in a bank, in a money
Can a TP deduct an obligation that had already been prescribed?
market placement which will yield a 10% interest per annum
No. The civil obligation has been already converted to a natural
What do you call the interest arising from this loan? Expense or
obligation, it cannot be considered as a bad debt expense because one of
Income?
the requirements is that the expense should be valid and subsisting.
Meaning it must not have prescribed
Interest Expense.

Suppose: What do you call the interest arising from the money market
TP is engaged in a Retail Business. One relative borrowed 100k, several placement?
years after he can no longer collect from the relative.
Interest Income.
Can the TP deduct it?
Will it yield a Tax Saving on the part of the TP?

31 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

that the interest expense should have been accrued during the taxable
Yes. Since the TP incurred an Interest Expense of 100,000, the TP will be year.
able to deduct such amount to his gross income. Accordingly, it will
reduce his tax liability. iii. Taxes

Formula Requisites of Deductibility

GR: Interest Expense is deductible in full. (1) The taxes should have been incurred with the BTP of the TP; and
XPN: TP earned interest income subject to 20% FWT during the same (2) It should have been paid or accrued during the taxable year
taxable year. Because if the TP earned income subject to 20% FWT
during the same taxable year, the TP cannot deduct the entire amount of Deductible Taxes
Interest Expense. It will be reduced by 33% of the Interest Income. The Provision of the Law only talks about those that are not deductible
(CAMILDOPE)
Suppose (Bar): a. Community Tax
The TP incurred interest expense of 100,000. During the same taxable b. Automobile Registration Fee
year, the TP earned an interest income from bank deposits in the amount c. Municipal Tax
of 50,000. The TP deducted the entire amount of 100,000 and the BIR d. Import Duties
disallowed the deduction of 100,000 because according to the BIR the e. Local Business Tax
entire amount of 100,000 is not deductible in full. f. Documentary Stamp Tax
g. Occupational Tax
Is the disallowance proper? h. Percentage Tax
i. Excise Tax (i.e., alcohol, cigars, etc.)
The disallowance of the BIR is not proper. A portion of interest expense
incurred is deductible by reducing first up to 33% of the interest income. Note: This is an exclusive list
The Interest Expense will be reduced by the Tax Differential Rate of 33%
of the Interest Income. Hence, the TP should not have deducted the Doña Evelina Case
100,000 but rather he should have deducted 100,000 less 33% of 50,000. Tax Benefit Rule

What if the Interest Income earned by the TP did not arise from
Bank Deposits? What if it arises from a Loan between Private
Individuals?
The Interest Expense shall be deducted in full, because interest income
arising from private individuals is subject to Normal Tax.
If she was able to refund CGT, shall we apply tax benefit rule?
No, because she cannot treat CGT as a deductible expense and because
CGT is not one of those expenses that can be allowed as deductible
expense. However, the case concerns local business tax, hence, it can be
treated as deductible tax expense

Optional Treatment of Interest Expense (Bar) Foreign Income Taxes

This rule states that if a TP incurred an interest expense in the acquisition
of property used BTP, the TP can treat the interest expense as a (1)
Capital Expenditure or as a (2) Revenue Expenditure
REVENUE
CAPITAL EXPENDITURE
EXPENDITURE
One that will benefit the TP for more than benefits the TP for only
1 taxable year. 1 taxable year.
Not deductible during the taxable year. It Deductible during the
will be deductible in the form of taxable year
depreciation expense
Suppose:
I bought a machinery with an acquisition cost of 1M on installment basis.
The supplier and I agreed that the transaction shall be subject to an
interest of 10%. I am required to pay within the taxable year. The interest
expense shall be 100,000.
How shall the interest expense be treated, should you add it to the
cost of 1M or treat it as deductible interest expense?
If the TP chose to treat the expense as a revenue expenditure, then the
100,000 shall be treated as interest expense
If the TP chose to treat it as a capital expenditure, it shall not be considered
as interest expense but rather it will form part of the purchase price.
Section 34 of the Tax Code provides that foreign income taxes can either
be tax deduction or tax credit. If the TP signified in his return that he is
availing of it as income tax credit, then it will be treated as tax credit.
But if the TP failed to signify in his return the manner on which the
income tax shall be applied, it will be treated as a Tax Deduction.
Suppose:
Manny Pacquiao’s accountant failed to include the prizes or winnings
from abroad as part of his income subject to PH taxes. He raised the
defense that these winnings are not subject to PH Income Tax because
the US government had already imposed taxes on its income.
Is his claim tenable?
His claim is not tenable. He is a resident citizen, hence, income sourced
from within and outside are subject to still be subject to tax.
What if Manny had paid foreign income taxes which will be treated
as Tax Credit?
Still untenable. Because, Manny failed to signify in his return that the
foreign income taxes will be treated as tax credit, thus if Manny failed to
signify in his return his intent to treat the foreign income tax as tax credit,
then such tax will be treated as tax deduction.

What if the TP indicated in return, can the entire amount be

Suppose:
credited?
In the same problem, 2 years had lapsed, so the interest expense is
200,000 which is 10% of every year.
No. There is a limitation. It is limited to the amount of tax against which
the credit is taken in proportion to the taxable income from sources
If the tax payer chose to capitalize it, should you add the entire
without the Philippines that bears to his entire Taxable Income for the
amount of interest expense for the entire transaction?
Taxable Year.

Yes. This is because the expense will be capitalized and therefore it will
form part of the acquisition cost. Suppose:
Abroad: 9M
If the tax payer will decide to expense it outright, can he deduct the PH: 1M
entire amount of 200,000 thousand during the taxable year? Total: 10M

No. Because the interest income had not yet accrued. If the interest Manny earned 90% income from Abroad. 10% from PH. Manny already
expense had not yet accrued, then it would mean that only the portion of paid 4M to the US Government.
the interest expense that had accrue shall be treated as interest expense,
this is pursuant to the elements of deductibility of the interest expense is How much is his tax liability?

32 | KAMM Notes

Assumption: 32% (Tax Table) or 320,000. Tax Liability: 3.2M
If Manny deducts all of the 4M, he will not pay anything to the PH
Government. Hence, it is unfair
How much shall be deducted? Is it 90% of 4M or 3.2M?
90% of 3.2M. Hence, 2,880,000 shall only be deducted. The difference
shall be collected by the PH Government which is 120,000.
iv. Ordinary and Necessary Expense
Requisites of Deductibility
(1) It must be ordinary, meaning reasonably expected in Business; and
it must be necessary, meaning it will increase the income of the TP
(2) It must be duly substantiated with receipts
(3) It must be reasonable in amount
(4) If the expense is subject to withholding tax, such tax must be
withheld and remitted to the BIR
Expenses subject to WT
a. Expenses
b. Salaries – XPN: MWE
c. FBT subject to FWT
d. Professional Fees
e. Security Services
Note: All payment of services is subject to WT
(5) The Expense must not be contrary to law, morals and public policy
(6) It must have been incurred or paid and deducted during the
Taxable Year
Reasonable in Amount –Reasonableness Test
There is no hard and fast rule. Only the portion that benefits the current
business is considered as the deductible expense If the amount is too
huge, it will not be considered as reasonable.
Representation Expenses (Bar)
Amount spent by the TP in order to represent itself to other business or
to promote the business.
Requisites | Representation Expense
Representation expense must not exceed
(1) 1% of the net receipts in case of services, or
(2) ½% of the net sales in case of retail/manufacturing business.
If it exceeds, the excess shall be disallowed because it is not
reasonable
(Bar) Suppose:
Mr. X is the President of the Golden Dragon Corp. He spent 150,000 for
the party that it had organized for some visitors abroad. 20,000 are given
to the witnesses. After the party, he spent 100,000 to the videoke bar.
Are these deductible?
Only a portion thereof. The 20,000 is not supported by receipts. Hence,
not deductible. The 100,000 is deductible, but subject to the limitation of
½% of the net sales of the corporation.
Note: Both of them must be substantiated by receipts.
Suppose:
In a lease contract, the rental fee is ₱100,000.
How much would the lessor receive?
₱95,000, because the lessee is required to withhold the 5%. He acts as the
withholding agent of the Government
How much should be the amount of income that shall be declared
by the lessor?
₱100,000
How much can the lessee deduct?
₱100,000
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
What if the lessee failed to withhold the 5,000 tax? Can the lessee
deduct the ₱100,000?
No. That is the effect of such failure.
Note: The deductible amount in fringe benefit expense is the Gross up
monetary value
Illegal Expenses (Bar)
Suppose:
F Corp asks one of its EEs, to apply for a competitor corporation. In the
event he gets hired, he needs to secure the trade secrets of the competitor
corporation. After he learns, he will go back to F Crop and it will pay him
a success fee.
Is it deductible?
No, because it is contrary to law, morals and public policy
Note: Facilitation fees are not deductible because these are kickbacks or
bribery. It is considered an illegal expense.
Rule
Thus, illegal Expenses are not deductible. However, Illegal income are
taxable based incomes.
All Events Test (Bar)
The right to income or liability must be fixed and the amount of such
income or liability must be determined with reasonable certainty.
Two Components
(1) The right to income or liability must be fixed; or
(2) The amount of such income or liability must be determined
with reasonable certainty
• These does not demand mathematical exactness. All
the law requires is that it must be reasonable
determined.
CIR v. ICC
Retainer Services | Reasonable Certainty
The following are the Professional and Security Expenses of the
Company:
(1) Legal Services 1984 & 1985
(2) SGV Auditing Services 1985
(3) Security Services 1986
When did ICC recognized all these expenses?
In the year 1896, because according to ICC, that is the only time when it
was paid to them.
Shall this be considered as Deductible Expense?
No. It shall not be considered as a Deductible Expense in the Year 1986. It
must be dependent the method of Accounting adopted by the Corporation.
Here, the Corporation adopted the Accrual Method of Accounting.
Under the Accrual Method, TP is allowed to deduct expenses at the
Taxable Year when it was incurred and not paid.
The court reasons that the ICC could reasonable known the charge of the
services, because it was already based on a retainer service.
All Events Test will only apply on Accrual Method of Recognizing
Expense. The Expense will be recognized when the expense has been
incurred.
Suppose:
A Law Firm is being paid on a retainer basis, meaning there is a proposal
of payment of 10,000 per month or 120,000 annually. TP hires an
accountant on an annual basis with a fee of 30,000 since 2016. It was only
in 2018 that the Law Firm sent a Billing Statement covering the period of
2016-2018. Accordingly, the TP only paid on 2018
Is the full amount deductible?
33 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

No. Because the TP had already reasonable knowledge to know the (3) Double Declining Balance Method (No)
amount. Mathematical Exactness is immaterial. (4) Other methods prescribed by the SOF

Suppose: Straight Line Method

In December 2016, the TP agreed to contract the services of an engineer. In this method, take into account the acquisition cost of the property and
They cannot agree on a certain amount, because he cannot determine the the estimated useful life of the property. Hence, the value is the
total expense. The project was finished in November 2017, but the Billing acquisition cost divided by the estimated useful life of the property. This
Statement was sent only on 2018. would mean that a certain value of that property shall be reduced by
ordinary wear and tear.
When shall it recognize the expense?
Suppose:
In 2018. The right to income or liability must be fixed i.e., in 2016 when Prop is 1M and TP will only use it for 5 years. At the end of 5 years, the
the Contract was Perfected. However, it was only in 2018 when such Prop would have zero worth because every year, 200,000 of its value
amount of such income or liability was determined with Reasonable shall be reduced.
Certainty.
vi. Depletion Expense
CIR v. General Food
Definition
The Advertising Expense of the TP is inevitable Large. The Supreme Pertains of exhaustion of natural resource from a wasting asset. This is
Court stated that the Ad created a Goodwill in favor of General Food the same with the concept of depreciation although this pertains to the
because it had largely promoted one of its products. The Advertising exhaustion of the natural resources from a wasting asset.
Expense cannot be longer treated as a Revenue Expenditure because it
created as a Goodwill, because it will benefit the future of the business as Wasting Assets
a whole. (1) Mines
(2) Gas wells
“Parang depreciation na siya but because it is not a depreciable property, (3) Oil
we shall call it Amortization. Apply the 5 years, etc.”
vii. Loss

Hosgens
Requisites of Deductibility
(1) It must have been incurred must have occur during the taxable year
The grant of Bonus in favor of one of the Officers of the Corporation. He is
(2) It must not be compensated by insurance. Otherwise, it is no longer
a Majority SH.
deductible

The sum of the Bonuses and Salary is inordinately large relative to the
income of the Crop. Hence, it fails to comply with the Reasonableness
Test. Hence, the Bonus shall be disallowed
Tambunting v. CIR
Involves the disallowances of several expense:
(1) Loss arising from the Foreclosure Sale - The TP submitted
Rematado and Sobasta Books. Those are the documents in order to
evidence the loss it has incurred in its pawned items. These docs
cannot justify the recognition of the expense because it does not
indicate the capital investment. Hence, it cannot justify the
recognition of the expense.
(2) The expense for security service - The Service provider did not
issue a receipt, but issued a certification that it had receive a
particular fee from Tambunting. It will not be sufficient. In order
that an expense shall be recognize, it should be substantiated by
Official Receipt or Invoice that it shall be registered before the BIR.
(3) Rent expense - Tambunting submitted rent expense and contract
of lease and certification from the Lessor representing rent charge.
Those docs will not suffice, in order that the TP shall recognize such,
it must be duly supported by OR
(4) Casualty Loss - Disallowed as an expense. Failed to submit before
the BIR within 45 days from the date of loss
Cohan Rule
The principle is recognized that when a TP claims a deduction, he must
point to some specific provision of the statute in which that deduction is
authorized and must be able to prove that he is entitled to the deduction
which the law allows.
Different Types of Losses
(1) Ordinary Loss – loss that arises from the sale of an OA or any
transaction dealing with an OA
a. Casualty Loss
b. NOLCO
c. Interest Retention Rule
(2) Capital Loss– loss that arises from Capital Asset
(3) Wagering or Gambling Loss – Exception to the General Rule that
Illegal Expenses are not Deductible but only up to the extent of
Gambling Winnings
• If King earned 200,000 and he suffered 500,000. He can only
deduct 200,000
(4) Abandonment Loss – accumulated value of the contracted area
being used for Petroleum Operations which the TP had abandoned,
and this Abandonment shall include the remaining value being
used in the Petroleum Operations
Types of Ordinary Losses
(1) Casualty loss – loss arising from theft, robbery, embezzlement and
other casual and unusual sudden occurrence. (TRECuso)
Note: He must submit a sworn declaration before the BIR within
45 days, otherwise, the TP cannot deduct Casualty Loss.
(2) Net Operation Loss Carry Over Scheme (NOLCO) - excess of
allowable deductions over the gross income.
Under the law, the excess of allowable deductions over the gross
income can be carried over during the next 3 consecutive taxable
years immediately following the year of loss.

v. Depreciation Expense Suppose:

2015 2016 2017
Definition Gross
2.0M 2.0M 2.0M
It is the allowance for ordinary wear and tear with respect to depreciable Income
property AD (3.0M) (1.8M) (1.0M)
Net
Requisites of Deductibility Operating 1.0M 0.2M (1.0M)
(1) Should have been charged off during the year Loss
(2) It must be reasonable in amount Special
(1.0M) + 0.2M (0.8M) + 1.0M
(3) The property must be used in BTP Deduction
Balance (0.8M) 0.2M
Methods of computing Depreciation Expense (Bar – Enumerate) Here, it can be used as a Special Deduction
(1) Straight Line Method (Important)
(2) Some of the Years Digit Method (No)

34 | KAMM Notes

What if the TP, in 2015, chose ID? Can he use the 1M loss as
Special Deduction?
No. Once the TP has chosen ID, it can no longer choose OSD.
If there is a consolidation of 2 corporations, what happens to
the NOLCO?
It amounts to Interest Retention Rule.
(3) Interest Retention Rule (75% Rule)
It provides that net operating loss can be carried over to the new
corporation only if there is no substantial change in ownership.
No Substantial Change in the Ownership if
a. Not less than 75% of the OCS is in the name of or being held
by the same person; or
b. Not less than 75% of the Paid-up Capital is held by or on
behalf of the same person
Reason behind Interest Retention Rule:
Before: Big corporations had the practice of buying small
corporations (not for philanthropic acts) for the purposes of
utilizing their operating losses in order to gain a tax benefit
Example:
BDO knew that WB had a loss 10M. BDO purchased WB for 1M for
example. It bought WB in order to utilize the net loss of 10M in
order to gain a Tax Benefit
Present Time: In order that these entities can carry over Net
Operating Loss as a Special Deduction, there must be no substantial
change in Ownership (Interest Retention Rule)
Example: BDO acquired Western Bank who has losses of 10M in
order to defer its gain.
Note: In order over these entities to avail of the net operation loss
as a special deduction, there should be no substantial change in the
ownership
viii. Charitable Contributions
Requisites of Deductibility
(1) Contributions must have been given during the Taxable Year
(2) The recipient must be Qualified Recipients
Who are qualified recipients?
a. Donations Deductible in Full
i. Donations given to the Gov’t, its political agencies or
subdivisions for religious, educational, cultural,
scientific, youth and sports, development & cultural for
a priority project
ii. In favor of international organization or foreign
institutions pursuant to a treaty or any international
agreements
iii. Accredited NGO
b. Donations subject to Limitations
Amount deductible shall be limited to (1) Corporate 5% or
(2) Individual 10% of the taxable income, before the
recognition of the charitable contribution
i. Gifts given in favor of the Government not a Priority
Project
ii. Donations given in favor of domestic corporations
established for religious, educational, cultural, scientific,
youth and sports, development & cultural
iii. Social welfare institutions
iv. Corporations established for the rehabilitation of war
veterans
v. NGO which are not accredited
Note: These enumerations are exclusive & restrictive
Suppose:
ABS-CBN usually donates for natural disaster victims. It donates to
Sagip-Kapamilya Foundation and not directly to individuals. Note
that Sagip-Kapamilya is under ABS-CBN.
Why?
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
By reason of deductions. The victims are not qualified recipient.
Sagip-Kapamilya is an Accredited NGO and a Social Welfare
Institution. (Allowable Deduction)
Another benefit
It will not fall under Section 101 of the Tax Code. Section 101 deals
with the list of donations exempt from Tax.
a. If the donations are given directly to the Government’s for
public purpose is shall be exempt
b. If the donations are given to NSNP, provided that not more
than 30% of the donations are not used for administrative
purposes
(3) The organization must be non-stock non-profit (NSNP)
(4) Not more than 30% of the donations shall be used for
administrative purpose (i.e., Rent, Salary)
ix. Pensions and Trusts
Can either be in the nature of being (1) Directly given to Employee or (2)
Given to a certain fund
(1) Employee: Deductible in full during the year in which the Pension
has been given to the EE
(2) Fund: Any contribution given to the fund shall likewise be
deductible. Deductible at the year given.
Suppose:
The contribution was given in 2017 but the pension was given in 2018
because this is the year when the employee retired.
When shall it be recognized as a deductible amount?
At the time when the contribution has been given to the fund
How about the time when the delivery of the pension to the
employee is made, is it still deductible?
No more, because the pension has already been utilized when the ER had
contributed to the fund.
x. Research and Development Expense
Aka “Pre-Operating Expense” in Accounting Terms
Definition
There are expenses incurred prior to the commercial operations. These
are typically incurred by manufacturing companies
Suppose:
Before I sell a given product or service, there should be feasibility and
experimental stage. During that stage, I would incur expenses. These are
called research and development expenses.
However, you can only deduct these expenses during the start of the
business operations.
Two ways in order to deduct
(1) Deducted outright at the start of the business operations
(2) It can be amortized for a period not more than 60 months or 5 years
Items not Deductible
Section 36(A)
(1) Personal Living or Family Expense – Because it is not made in
connection with BRP of the TP
(2) Buildings or Permanent Improvements – Because they are
considered as Capital Expenditures. Only a portion thereof can be
considered through Depreciation Expense
(3) Restoration of a Real Property – It is a Capital Expenditure
(4) Premiums Payments – Premium payments through a life insurance
policy of an EE, if the beneficiary is the ER (TP) will not be
considered as deductible expense
Income Tax on Individuals
Resident Citizens, Non-Resident Citizens, and
Resident Aliens
35 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

i. Coverage o 2.5M Income. He failed to indicate in his return that he

is availing the 8% OCIT. He can no longer avail such.
(1) Resident Citizens – taxable on income from all sources (4) In order for a TP to avail of the 8% Optional Tax:
(2) Non-resident Citizens - only on income derived from sources a. He must update his Certificate of Registration in order to
within indicate that he is availing of the 8% Optional Tax; or to
a. A Filipino citizen working and deriving abroad as an Overseas indicate in his first quarterly return that he is intending to
Contract Worker (OCW) is taxable only on income from adopt the 8%
sources within the Philippines b. Otherwise, there is a presumption that he is availing of the
b. OCW – Filipino citizens who are physically present in a Graduated Income Tax
foreign country as a consequence of their employment. Their (5) Manner of Computation:
salaries and wages are paid by an employer abroad and is not a. 8% shall be based on the gross sales/receipts in excess of
borne by an entity or person in the Philippines 250,000 in case he is not a mix earner.
c. An OCW’s income arising from sources outside the b. Hence, there should be no deduction based on COS and AD
Philippines is exempt from income tax
(3) Resident Aliens - only on income from sources within the Computation of the 8%
Philippines. GR: 8% x Gross Sales or Receipts – 250,000 = Taxable Income
XPN: When he is a mixed earned (Income from Compensation + BTP)
ii. Taxation on Compensation Income
Hence, the computation shall be 8% x Gross Sales/Receipts without the
Income arising from an employer-employee relationship. 250,000 deduction, because it was already deducted in the
Compensation Income under the Tax Table.
(a) Inclusions
Note: It is based on the Gross Sales or Receipts (not Gross or Net Income)
(1) Monetary compensation – If compensation is paid in cash, the full
amount received is the measure of the income subject to tax ***For further discussion, refer to the notes given by Atty. Tin during the
(2) Regular salary/wage TRAIN law seminar

Note: Separation pay/retirement benefit not exempt iv. Taxation of Partners in a General Professional Partnership

See: Separation/Retirement/13th month pay See discussion

(b) Exclusions v. Taxation of Passive Income

(1) Fringe benefit subject to tax See discussion

(2) De minimis benefits
(3) 13th month pay and other benefits and payments specifically vi. Taxation of Capital Gains
excluded from taxable compensation income
(a) Income from Sale of Shares of Stock of a Philippine
iii. Taxation of Business Income/Income From Exercise of Corporation
Profession
Tax Implication
All income obtained from doing business or exercising of profession shall (1) Listed – subject to 6/10 of 1% stock transfer/transaction tax based
be included in the computation of gross income. on the GSP
(2) Not listed:
Individuals earning purely business or professional income a. Prior to TRAIN Law – It shall be subject to 5% CGT based on
Individuals earning income purely from self-employment and/or the first 100,000 net gain. The excess shall be subject to10%
practice of profession, whose gross sales/receipts and other b. TRAIN Law – fixed at 15% FWT based on the net gain
nonoperating income does not exceed the VAT threshold as provided
under Sec. 109 (BB) of the Tax Code, as amended, shall have the option to Situs
avail of: (1) DC – All income from such sale is sourced from within
(1) The graduated rates under Sec. 24 (A)(2)(a) of the Tax Code, as (2) NRFC - All income from such sale is sourced from outside
amended; OR (3) RFC:
(2) An eight percent (8%) tax on gross sales or receipts and other non- a. 85% or more – sourced from within
operating income in excess of two hundred fifty thousand pesos b. Less than 85% - sourced from outside
(₱250,000.00) in lieu of the graduated income tax rates under Sec.
24 (A) and the percentage tax under Sec. 116 of the NIRC. Note: Don’t confuse this with the percentage on Dividend Income

(a) 8% Optional Tax System (b) Income from sale of Real Property situated in the Philippines
(Sec. 24D, NIRC)
Expected Bar Question
(1) Advise your client if he should adopt the 8% or the Tabular Tax. Coverage
(2) Applicability of the 8% Optional Income Tax aka Gross Sales Sale, barter, exchange or other dispositions of RP as a Capital Asset
Tax/Gross Receipts Tax
See discussion
Points to remember
(1) This only applies to Individual TP who are engaged in Trade or What if the transaction is a…
Business who does not earn more than 3M. (1) Pacto de Retro Sale - It is subject to CGT and the tax will be paid at
a. It only applies to self-employed individuals. the time of execution of the agreement as there is already a transfer
b. It will not apply to individuals who earn income from of ownership at this instance but shall only be subject to the right of
compensation. the seller to repurchase the property.
(2) 8% Optional Corporate Tax (OCIT) will be applicable only if the TP
earned gross sales/receipts not exceeding 3M. Repurchase | Another CGT, no double taxation
a. Otherwise, the TP has no other option but to adopt the If the seller exercised his right to repurchase, it will be subject to
graduated income tax. CGT. This is a separate transaction, hence, there is no double
(3) If the TP opted to adopt the 8% OCIT, the TP will no longer pay taxation.
percentage tax or VAT.
a. If the TP chose graduated income tax, he is still subject (2) Conditional Sale – There is a suspensive condition but ownership
toother percentage tax or VAT. over the property will already be transferred.
o 3.5M Income. No other choice. He must adopt the
Graduated Income Tax. When will the tax accrue?

36 | KAMM Notes

It is subject to CGT and the tax will accrue at the time of the
perfection of the agreement
(3) Contract to Sell - This is only an offer to sale a property under the
condition that the property will be fully paid first and upon full
payment of the price, that will be the time of the execution of the
deed of absolute sale.
When will the tax accrue?
It is subject to CGT but the tax liability will accrue at the time of the
fulfillment of the condition to pay the price of the property.
(Bar) Suppose:
A purchased a property in the US, the registered owner is under the name
of B. B executed a Deed of Reconveyance so that A can register it under
A’s name (Trust).
Is the transaction subject to tax?
No. Because there is no consideration. Hence, it cannot be one of those
mentioned above as disposition of real property classified as capital asset
subject to CGT
Moreover, donor’s tax cannot be imposed as well because Bis not the real
owner of the property as she is holding it only as trustee. Thus, as a rule
when the trustee is transferring the property to the rightful owner, it shall
not be subject to donor’s tax
Note: CGT must be paid 30 days from the date of sale
(4) Forced Sale
Foreclosure Sale
If there is already a sale at a public auction. The Sheriff will issue a
certificate of sale. The judgment debtor will have period to redeem the
property, depending on the personality of the creditor, whether the
creditor is a juridical or natural person.
When will CGT accrue?
At the time of issuance of certificate of sale or at the time of the
consolidation of the certificate of sale, when the debtor failed to redeem
the property.
Implication of redemption of the property
CGT will only accrue at the time of the expiration of the period. Hence, if
there is redemption, the CGT will not accrue. If there is failure to redeem
the property, this is the only time that the CGT will accrue.
When shall it be paid?
The CGT shall be paid within 30 days after the expiration of the
redemption period.
CIR v. UCPB
If the Property is CA
Apply CGT which shall be paid 30 days after the expiration of the
redemption period.
If the property is OA
Apply CWT which must be paid within 10 days after the close of the
month when the redemption period expired.
(c) Alternative Taxation
Definition
A system whereby the individual TP has the option to choose between
24(A) and 24(D) in a transaction of a sale of real property classified as
capital asset
(1) 24(A) –Normal Tax
(2) 24(D) –Capital Gains Tax
Application | Sale of RP to Government
It will only happen if the sale is a sale of RP as CA in favor of the
Government, Political Subdivisions or GOCC.
Who can avail?
Only applies to individual TPs. Hence, this shall not apply to Corporate
TPs.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Expropriation Sale
Exercise of eminent domain whereby the Gov’t will take the Property of
the Individual
Suppose:
X owns a land with a 6M Market Value, which has 4M Acquisition Cost
and 3M value based on the Government’s appraised value.
Is alternative taxation applicable? If yes, which alternative is
better?
The individual TP has the ff. options
(1) 24(D) CGT which is 6% of 6M (Market Value) - The tax liability of X
is 6% based on the gross selling price or market value whichever is
higher.
(2) 24(A) NT –No tax because the sale of RP is not beneficial to the TP.
X, in the case, did not earned any income, as a matter of fact, X
incurred a loss. X bought the property for 4 million but sold it for 3
million only. Therefore, there is no income or flow of wealth.
Accordingly, it is better to adopt Sec. 24(A) since the sale of RP to the
Government will not incur any tax liability on the part of the TP.
Note: In the case, the principle of alternative taxation allows X to choose
section 24(A) of the tax code for his tax liability since it is beneficial to him.
(d) Ways of Avoiding CGT
(1) Sale of Principal Residence
It may be exempt from CGT upon compliance of the following
requisites:
a. It must be a sale of principal residence
b. The acquisition or construction of a new principal residence
must be for the reason of the sale of the principal residence
c. The acquisition or construction must be within 18 calendar
months from the date of sale or disposition of the principal
residence
d. Historical Cost (Accountancy students only)
e. A notice must be given to the CIR/BIR of his intention to avail
of the tax exemption and this notice must be submitted to the
CIR/BIR within 30 days from the date of sale or disposition
f. The tax exemption can only be availed of once every 10 years
g. The TP must establish an escrow account where the amount
of the tax due shall be deposited
(Bar) Suppose:
Z is the registered owner of a house and lot. Z sold it for 5M because
he decided to just stay in a condominium unit. He purchased the
Condo for 3M.
Is the sale exempt from tax?
The amount that shall be exempt is only up to the extent of 3M
which is amount utilized for the purchase of the new principal
residence. Hence, if there is an unutilized selling price, the excess
shall be considered as the taxable portion
What if the 2 million was used for the furniture and other
things to be used in the residence (Joseph)?
Generally, the 2 million will still be subject to CGT. But if the 2
million was used for the purchased of furniture and other fixtures
which formed part of the contract in buying the unit, like when the
unitis considered as fully furnished, since the 2 million is
incorporated in the expenses in buying the fully furnished unit,then
it can be exempt from tax. But if the purchased of the furniture or
fixtures are indicated in other receipts or documents then it is
subject to tax.
(2) Alternative Taxation
(3) Sale by reason under CARL
(4) Tax Free Exchange, Sec. 40(C)
vii. Aliens employed by Regional Headquarters, Regional
Operating Headquarters, Offshore Banking Units, and
Petroleum Service Contractors
37 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

(1) Domestic Corporation – subject to tax on income sourced from

Prior to the TRAIN law: The aliens enjoy a preferential tax rate of 15%
TRAIN law: All individuals shall be treated alike with respect to all other
EEs. Their income shall be subject to the graduated tax table provided
under the TRAIN law.
viii. Rules on Other Sources of Income
(1) Cancellation of Indebtedness
Indebtedness may be cancelled because the Debtor will render
services or for pure generosity or a transaction between SH
a. Rendition of Service by the Debtor – Considered as a
Remuneratory Donation. This is the cancellation of
indebtedness by rendition of service on the part of the debtor
in favor of the creditor.
Tax Implication
Subject to Income Tax
within and outside the PH
(2) Foreign Corporation – only sourced from within
(3) RFC and NRFC - 30% FWT of the gross income
• The withholding agent has a responsibility or task to remit
the tax to the government
• Government needs to ensure the collection of the tax so that
if the NRFC will not pay the tax at all, the responsible entity to
pay such is the withholding agent.
NDC
NDC had a loan from a NRFC. Hence, the NRFC, who is the creditor,
earned the interest income. Situs of interest income is the domicile or
country of NDC. The Government cannot reach its taxing arm and impose
the collection upon the NRFC because it is outside its territorial
jurisdiction. So, the government collects it on NDC. Second issue raised by
NDC is that it is not liable to tax because he is not the TP. NDC is incorrect,
because a withholding agent is likewise liable for the taxes it failed to
withhold and failed to remit it to the government.

(Bar) Suppose: Tax Implications of Different Corporate TP

Mr. Gipit borrowed 100k. After 3 months he paid 25k. Mr. A All other incomes not subject to FWT shall be subject to 30% NCIT based
cancelled the obligation in exchange, Mr. Gipit will clean the on the net income
house of Mr. A.
Domestic Corporations
What is the tax implication?
i. Taxation in General
It will be subject to Income Tax. Taxable Income is 75k
because that’s the only indebtedness that was cancelled.
DC | Tax Implication
GR: Net income shall be subject to 30% NCIT
(2) Pure Generosity XPN: Section 27, NIRC
It is a donation Hence, it will be subject to Donor’s Tax (1) Interest Income from Bank Deposits/Deposit Substitutes - 20%
FWT
(3) Transaction between SH and Corporation (2) Interest income from an expanded FCDA -15% FWT
It shall be considered as Declaration of Dividends (3) Royalties -20% FWT
(4) Sale of S/S not listed in the stock exchange - 15% CGT based on the
Hence, the tax implication will depend on the status of the SH and net gain
the status of the corporation. (5) Sale of RP classified as a CA – 6% CGT of the Gross Value
(6) Inter-Corporate Dividend
Income Tax on Corporations
Inter-Corporate Dividend Principle | DC to DC/RFC, no Tax
If a DC declares dividend in favor of another DC or a RFC, the
General Principles
dividend income shall not be subject to tax
(1) DC to DC –Not Taxable
Corporation under the Tax code
(2) DC to RFC –Not Taxable
Corporations includes:
(3) DC to NRFC – 30% FWT unless Tax Sparing Rule applies, then
(1) Partnerships
the tax rate shall be 15% FWT
• No matter how created or organized
• An unregistered partnership shall be treated as a corporate Tax Sparing Rule
TP A lower 15% FWT will be imposed on dividends received by an
(2) Joint stock companies NRFC if the country in which the NRFC is domiciled allows a tax
(3) Joint accounts credit against the tax due from the NRFC representing taxes
(4) Associations deemed to have been paid in the Philippines (PH) equivalent to
(5) Insurance Companies 15%.

It does not include: RFC Issuer

(1) GPP (1) RFC to DC – Taxable
• Merely a pass-through entity (2) RFC to RFC – Taxable (income source from within)
(2) Joint venture or consortium projects engaged in construction (3) RFC to NRFC – 30% FWT unless Tax Sparing Rule applies,
projects then the tax rate shall be 15% FWT
(3) Joint venture or consortium projects engaged in petroleum NRFC Issuer
operations under a contract or undertaking with the government (4) NRFC to DC –Taxable
(5) NRFC to RFC – Not taxable
Types of Corporate TP (6) NRFC to NRFC – Not taxable
(1) Domestic Corporation - Corporations established under the laws
of the Republic of the PH. Prize and Winnings | NCIT
• If the Article of Corporation was submitted to SEC PH, then it Not subject to FWT, but it shall be subject to NCIT because it is not
is a DC. included on the list.
• This does not talk about the nationalities of its owners
because there can be a DC which is own be foreign nationals Alternative Taxation | Not applicable
(2) Foreign Corporation – Established under the laws other than the • Does not apply to Corp TP
laws of the Philippines • If the seller is a corporate TP, and it sold the property to the
a. Resident FC– engaged in business in the PH government through an expropriation sale, the TP does not have
b. Non-Resident FC – not engaged in business in the PH but the option to choose between NCIT and CGT, because it only
earned an income on an isolated transaction applicable to situations where the seller is an individual TP

Tax implication on the income:

Resident Foreign Corporations

38 | KAMM Notes

RFC | Tax Implications
GR: Net income shall be subject to 30% NCIT
XPN: Section 28, NIRC
(1) Interest Income from bank deposits or deposit substitutes – 20%
FWT
(2) Interest income from an expanded FCDA – 7.5% FWT
(3) Sale of S/S not listed in the stock exchange - 15% CGT based on the
net gain
Inter-Corporate Dividend | Not Applicable
CGT is not applicable to a RFC when it sells a RP. Such income is subject
to NCIT.
Property Ownership of RFC
A RFC can acquire a condominium property and parcels of lands in the
PH. The 1987 Constitution did not qualify, it was just explicit on the % of
ownership.
CGT does not apply to RFC
Suppose:
A DC and a RFC Corporation acquired a parcel of land classified as a CA.
If a DC sells it to another individual, what is the tax implication?
It shall be subject to 6% CGT.
What if a RFC sells a parcel of land to another individual?
It shall not be subject to CGT, because there is no CGT to be imposed on a
RFC. It shall be subject to NCIT.
Suppose:
The land was purchased in the amount of 10M it was sold for 6M. Net
income is 4M.
Tax implication if the seller is a Corporation TP?
DC - subject to 6% CGT of the 10,000,000 = 600,000
RFC- subject to 30% NCIT of the 4,000,000 = 1,200,000
What if there was undervaluation and the land was sold for the
same price i.e., 6M purchase price and 6M selling price?
DC– subject to 6% CGT of the 6M = 360,000
RFC– not subject to tax because there is no net income
Note: These manifests one of the inequalities created by law, with respect
to sale of RP classified as CA
Pascual & Dragon v. CIR
1965 they bought parcels of land.
1968 they sold the two parcels of land. They earned a net profit of
₱165,000.
1970 they earned a ₱60,000 net profit.
They paid a CGT 1970 &1974 and availed of tax amnesty
CIR assessed and requested to pay 107,000 deficiency income taxes.
However, they protested. The commissioner’s ruling banks on Section 20
of the Tax Code & Section 24 of the Tax Code.
Case Comparison
Evangelista case: They had used the property for 15 years. The
Evangelistas spread it out to different individuals in order to earn profits
and they began to earn some parcels of lands. Afterwards, sold the
property.
Pascual case: They had held the property only for 2 years, and dissolve
the co-ownership after than 2-year period.
There was real intent.
Obillos
Jose Obillos Sr. bought two parcels of land. He transferred his rights to his
4 children. His 4 children took possession of the land for 1 year with the
intention to convert it to a residential land. After a year, they sold the land
and gained a profit of 137,000. After 5 years, end of the prescriptive
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
period, the CIR required them to pay corporate tax, surcharges and fraud
fee.
CIR alleged that the siblings formed an unregistered partnership, hence
should be subject to NCIT.
Is the CIR correct?
No. The mere deviation of gross receipts does not imply the creation of a
partnership. The indispensable element is the intention of the parties to
create a partnership.
Other Business Entities
i. Unregistered Partnership
Unregistered partnership
It is treated as a Corporate TP under the tax code.
Requisites
Pascual &Dragon and Evangalista, the SC held
(1) There must be a contribution of money property or industry; and
(2) There must be an intention to provide profits for themselves
Pascual and Dragon. They had no intention to derive any profit from the
pooling of funds.
Evanglista. They had the intention to earn profits and to divide the profits
among themselves.
Effect of Creation of Unregistered Partnership:
(1) Subject to corporate income tax
(2) The distribution of profits to the partners shall treated as
declaration of dividends.
(3) It shall be subject to Percentage Tax or VAT, as the case may be.
Because they are treated as individuals engaged in business.
Estate - mass of properties acquired from the decedent. It will be
acquired upon death (Article 777 of the NCC) by operation of law.
Suppose:
Mr. A earns building in session road and the commercial spaces on this
building is leased out to several individuals. He earns around 1M every
month. On June 30, 2018, he died.
Who is the TP from January to June 30, 2018?
Mr. A
Who will report the income from July 1 to December 2018?
It depends.
Estate is on Judicial Settlement – the income derived from the property
shall be reflected by the estate of A as a separate TP
Estate is under Extra Judicial Settlement – the income shall be reported by
the heirs.
Note: Prior to the TRAIN law – Estates as a separate individual TP can
avail of 20,000 personal exemption. However, there is no personal
exemption under the current law. Hence, apply Normal Tax.
Suppose:
There is extrajudicial settlement of A, B and C. They improved the
building, increased the rent income and decided to divide the profits
between them.
Who is the TP? Is there a partnership?
Yes. There is an unregistered partnership. Hence, the income shall be
subject to a corporate income tax. Moreover, the distribution shall be
subject to FWT because the distribution is treated as a dividend income.
Suppose:
Lotto. They shared funds to buy tickets. A, B and C won 10M.
What is the tax implication of the 10M?
There is still an unregistered partnership.
39 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Note: If a corporation shall earn a prize, the 20% FWT shall not be MCIT 150 80
applied. Under Section 27, there shall be no FWT to be imposed on prizes
or winnings earned by corporate TP. The income shall be subject the (50)
Excess 50
global tax system. Hence, the prize or winnings shall be subject to a 30% Carried Over
corporate income tax. Moreover, it shall be subject to FWT because of the Tax Due 150 50
distribution of the dividend income.

Example 2
ii. Co-Ownership
2016 2017 2018
Co-ownership
NCIT 100 100 100
It will not be treated as if they created a business. Rather, it shall be
treated as income of individual TP. Hence the tax implication will depend. MCIT 150 150 80
RP as CA: CGT
PP: Normal Tax (100)
Excess 50 50
Carried Over

Suppose: Tax Due 150 150 0

A and B bought a land. After 20 years, they decided to sell it.
Grace Period
Was there unregistered partnership? 4 years of Grace Period for the suspension of the application of the MCIT

No. Because the intention was not to earn profit. The Court explicitly state that new corporations have 4 years of
suspension of the application for MCIT
What if they sold it 2 years after the purchase with the intention to
gain profit?
Manila Banking v. CIR
Remember
There is an unregistered partnership
1961: Manila Banking commenced its commercial business operations.
Minimum Corporate Income Tax There was a 4-year suspension.
1987: The MB BSP issued a resolution which prohibited the bank to
See Constitutionality of MCIT further engage in business because of insolvency
1998: RA 8424 was enacted. Manila Banking’s registration with BIR as a
Tax imposition new corporation
2% of gross income 1999: It registered as a thrift bank
2000: Sent a letter to the BIR if the bank is exempted to pay MCIT by
Imposition; Grace Period | 4th Taxable Year virtue of the 4-year grace period. Manila banking filed its ITR.
Beginning on the 4th taxable year immediately following the taxable year 2001: BIR issued a ruling which states that Manila banking is exempt.
in which such corporation commenced its business operations. Hence, Manila Banking filed a refund. BIR Denied.

Application | MCIT > NCIT On appeal, CTA did not grant the petition of Manila Banking.
The TP will only pay MCIT if the MCIT is higher than the NCIT
Is Manila Banking exempt from paying MCIT?
Suppose:
Corporation registered in January 2012 Yes. The 4-year grace period it is for new corporations to stabilize their
MCIT will start in 2016. business so that they will not be reporting losses year in-year out.
NCIT –1.0M
MCIT – 1.5M By virtue of the issuance of law and by a RR 9-45 which regulates thrift
banks, the commencement of business operation, shall be reckoned from
The TP will pay MCIT because the MCIT is higher than the NCIT the time the SEC issues a certificate of authority to operate or registration
certificate.
In 2017
NCIT –2.0M The reckoning date of the 4-year period should be from the issuance of
MCIT – 2.5M the certificate of authority to operate in 1999.

The TP will still pay MCIT because the MCIT is higher than the NCIT. Points to remember
(1) Interpretation of the 4-year period
If in 2017 The Court did not explicitly mention about a 4-year grace period. It
NCIT –1.0M mentioned 4-year suspension period for the application of the
MCIT – 0.3M MCIT.

The TP will pay NCIT because the NCIT is higher than the MCIT. During that 4-year period, the TP do not need to compare its NCIT
and MCIT. It will start comparing NCIT and MCIT only on the 5th
Concept or Nature year of the company’s operation.
MCIT is not an additional tax imposition.
SC held that the counting will begin from June 23, 1999. It
In fact, it is only a mechanism or mode in order for the Government to mentioned that the Manila Bank shall only pay its MCIT 4 years
Collect Taxes after 1999. RR 4- 95 and not RR 4-98 shall apply. Hence, Manila
Bank should only pay after the year 2002.
Carry-Over | Excess of MCIT over NCIT
The excess can be carried over for the next 3succeeding taxable years (2) The Reckoning Date
immediately following the payment of MCIT The date of commencement of business operations. RR had defined
the date of commencement of business operations. The case
Note: Similar to the concept of NOLCO mentioned to RR/date: • RR 9-9 – date of registration with the BIR
(1961)
Example 1: • RR 4-95 – date of registration with the SEC or date of issuance as
thrift bank whichever comes later
2016 2017
What RR shall apply?
NCIT 100 100

40 | KAMM Notes

In cases of thrift banks (only on thrift banks), the date of
commencement of business operations shall apply or RR 4-95
should apply.
January 29, 1999 is the date of registration with the SEC and June
23, 1999 is the date of issuance as a thrift bank which comes later.
Hence, it shall be the date of the reckoning period.
Note: (Bar)
Knowledge of the commencement of business operations which is the
date of registration with the BIR.
CREBA v. Romulo
Purpose of imposition MCIT
Defeat the scheme of Corporate TP in jacking up their expenses in order
for these Corporate TP not to pay taxes at all
Gross Income
The difference between Gross Sales and Cost of Sales
Read under the Tax code
Instances where the SOF can suspend the application of MCIT.
CIR v. PAL
PAL is a DC. PAL was granted a franchise by the Congress which
authorizes it to operate and maintain a business carrying passengers
overseas.
In 2001: Allegedly it has no income. Taxable Income which is left with
unapplied CWT. Sent a letter to the BIR. Its request was rejected and
instead was assessed its MCIT.
FLD for deficiency MCIT was sent. PAL protested for such tax liability. BIR
rejected the protest MRE 66-03 and immediately demanded payment
from PAL.
Is PAL liable for MCIT?
PAL is not liable for deficiency MCIT. In fact, PAL is exempted to pay MCIT.
Section 13 of PD 1590:
PAL shall pay its basic or NCIT (35% at that time, at present time 30%), or
to pay its 2% franchise tax of its gross revenues derived from all sources.
The payment of such taxes will be in lieu in all other taxes. PAL is also liable
to pay MCIT
Section 13 does not specifically provide that PAL is also liable to pay
MCIT. The MCIT should be in lieu in all other taxes.
Points to remember
NCIT – based on the annual net taxable income of PAL
MCIT - Gross income of the corporation
Payment of Franchise Tax in lieu of all other taxes shall include MCIT.
PAL’s charter states that it shall only pay BCIT and Franchise Tax which
includes payment of MCIT, whichever is lower. Hence, the payment of tax
shall be in lieu of all other taxes.
Proprietary Educational Institutions and
Proprietary Hospitals
Coverage [Section 27(B)]
H & EI which are
(1) Proprietary and
(2) Non-Profit
Preferential Tax Rate or Treatment
The lower preferential tax rate shall be considered as an incentive to
these institutions which deliver the basic needs of the people which shall
be delivered by the Government. Hence, they shall enjoy a lower rate of
10%
Predominance Test | Unrelated > 50%
If the gross income from unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
50% or more related – 10%
Less than 50% related – 30% NCIT
Application of MCIT
GR: Do not apply if 10% rate is used
XPN: Apply it if 30% NCIT is used. Hence, compare NCIT to MCIT.
Improperly Accumulated Earnings Tax
Retained Earnings
It is also called retained earnings as a proper accounting term and entry
Rationale
This is included in RA 8428 because of the scheme adopted by closely
held corporations in avoiding the payment of FWT. Prior to the provision,
this is the usual scheme of Family Corporations.
Suppose:
Tin and 4 sons were left by a deceased husband. The father left a building
who earns 1M per month. Hence, there was a corporation established for
the leasing business. Tin told them that if they distribute the income they
will be subjected to a FWT at the rate of 10%. In order for them to not pay
taxes, they will not distribute the income, which was the scheme for
several years. However, the scheme was discovered by the Government.
RR 2-2001
IAET -Imposition of 10% Tax Rate. It shall be considered as a penalty for
unreasonably accumulating the earnings of a corporation.
(Bar) Coverage of IAET (Section 4 of RR 2-2001)
The coverage of IAET shall be the taxable income earned by DC which are
closely held corporations.
Closely held corporations are corporations where at least 50% of its OCS
is owned directly or indirectly by or for not more than 20 individuals or
SH
Question 6 | Bar 2018
A Korean corporation engaged in the business of manufacturing electric
vehicles, established a branch office in the Philippines in 2010. The
Philippine branch constructed a manufacturing plant in Kabuyao,
Laguna, and the construction lasted three (3) years. Commercial
operations in Laguna plant began in 2014
In just two (2) years of operation, the Philippine branch had remitted
profits in an amount exceeding 175% of its capital. However, the head
office in Korea instructed the branch not to remit the profits to the Korean
head office until instructed otherwise. The branch CFO is concerned that
the BIR might hold the Philippine branch liable for the 10% IAET for
permitting its profits to accumulate beyond reasonable business needs.
Is the PH branch of Kria subject to the 10% IAET under the
circumstances stated above? (2.5%)
No, the law is only imposed to DC classified as closely held corporation.
Moreover, there is no tax to be imposed if the profit will not be remitted.
Presumption of IAE
If the Corporation has accumulated earnings of more than 100% of the
paid-up capital, there is a presumption that there is IAE
• Retained earnings are accumulated earnings over time or income
that has been accumulating over time
• Subscribed capital is the portion of the capital that is already
purchased but not yet paid
• Paid up capital is the portion of the capital that has already been
subscribed and paid
Why is retained earnings the basis?
Because if the Corporation paid or distributed its dividend, then the
retained earnings should be decreased and not accumulated.
Excuse for accumulation -RR 2-2011
Possible situations that would lead to a legal accumulation of earnings
(1) Projects
(2) Plan for acquisition of properties
(3) Plan to pay-off pre-existing obligations
(4) When there is an intention to reserve the money for investments
41 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

(1) This is only imposed if a branch remit profits on a head office; and
Note: There must be submission to the BIR a board resolution approving (2) This is only imposed on RFC
the plan/project.
Branch (Same Entity) vs. Subsidiary (Separate Entity)
Immediacy Test • Branch is one where a FC will register itself as having an office in
Reasonable needs of the business (RR 2-2001) in order to justify the the Philippines. It only establishes a separate office. It is just an
accumulation of earnings must be an immediate need and a reasonably extension of the FC in another state. The branch and the head office
anticipated need. are the same entity
• Subsidiary –If a FC decided to incorporate a new entity in the PH
Hence, it will only be considered as having complied with the test, if the and this FC will just own shares of stocks on the corporation in the
reasonable need is an immediate need and a reasonable anticipated PH. Hence, it has a separate entity from the parent company
need.
Importance of differentiation
Corporations not covered by IAET Their remittance to the parent or head company is different.
Under Tax Code
(1) Banks and other non-bank financial institutions Subsidiary | Dividends
(2) Insurance companies If the Subsidiary will remit profits to the parent company, it shall not be
(3) Publicly Listed Companies subject to BPRT. The remittance shall be considered as dividends
Under RR GR: It will be subject to 30% FWT
(4) Taxable partnerships XPN: When Tax Sparing Rule is applicable
(5) GPP
(6) Non-taxable joint venture (i.e., engaged in petroleum and Tax Sparing Rule | Tax Forgone
construction projects) There should be a tax that is spared. The domiciliary country of the NRFC
(7) Locators who are entities registered with PEZA – they enjoy a tax must spare a tax through Tax Credits. The tax spared must be at least
holiday and afterwards they will enjoy a 15% preferential tax rate equal to or more than the tax forgone in the PH.
on their gross income. Already in lieu of other taxes both national
and local taxes. Under the law, if there is a tax sparing rule the tax forgone must be at least
15%.
Exempt Corporations
Subsidiary
Non-stock Non-profit Suppose:
This is the common denominator from the list (so you do not need to P&G PH paid P&G US dividends. This will be taxed by US because US
memorize the list) adopt worldwide tax system. This has also been taxed by the PH. Then,
there is an indirect or international duplicate taxation. To countervail the
GR: All NSNP shall be exempt effects of double taxation, PH will spare a tax. Under our law, the tax
XPN: Section 30 paragraph (2). “Notwithstanding the provisions in the forgone is 15% as long as the domiciliary country will also spare.
preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or Assuming the US Gov’t will grant a tax credit equivalent to 20% of
from any of their activities conducted for profit regardless of the disposition the dividend income, will the PH government will reduce the 15%?
made of such income, shall be subject to tax imposed under this Code.”
Yes.
Material Considerations
Source is material What if the tax credit granted by the domiciliary country of the
Usage is immaterial NRFC is only 10%?

NSNP HOSPITAL NSNP EDUC. The 30% rate will be applied in the PH because the tax spared in the
ADE Not ADE ADE Not ADE foreign country is not equal to or more than the tax forgone in the PH.
Section Section Art. XIV, 4(3) Section
Related Source
30 30 Section 30 30 Branch | 15% BPRT
Unrelated Source Taxable Taxable Art. XIV, 4(3) Taxable If the branch remits profits to the head office, this is not treated as
declaration of dividends. Instead, it shall be subject to 15% BPRT based
Note: on the amount actually remitted on the amount earmarked for
Art. VI, 28 only pertains to RP remittance.
Art. XIV, 4(3) only pertains to Revenue
Question 6 | Bar 2018
St. Luke’s Medical Center
Landmark Case A Korean corporation engaged in the business of manufacturing electric
vehicles, established a branch office in the Philippines in 2010. The
They cater to paying and non-paying patients. They obtain billions from Philippine branch constructed a manufacturing plant in Kabuyao,
paying patients. Although, they still have subsidies used for non-paying Laguna, and the construction lasted three (3) years. Commercial
patients from foreign government and other organizations. operations in Laguna plant began in 2014

BIR argues that SLMC is no longer a charitable institution because it
earned billions from paying patients
Dictum in Lung center, Test of Charity. Act of accepting paying patients
will not derogate the institution as a charitable institution, as long as it
had passed the test of charity
BIR argues that it is taxable because the income was derived in a
proprietary activity
In just two (2) years of operation, the Philippine branch had remitted
profits in an amount exceeding 175% of its capital. However, the head
office in Korea instructed the branch not to remit the profits to the Korean
head office until instructed otherwise. The branch chief finance officer is
concerned that the BIR might hold the Philippine branch liable for the
10% IAET for permitting its profits to accumulate beyond reasonable
business needs.
Is it subject to 15% branch profit remittance tax (BPRT)? (2.5%)

Under Section 30of the Tax Code, it shall be subject to tax. But the SC shall
apply the predominance test Section 27, because it is a proprietary
hospital.
Branch Profit Remittance Tax
For the profits already been remitted, yes, because it imposed on an
amount actually remitted or earmarked for remittance.
For the profits not yet remitted, no, because BPRT is only imposed on an
amount actually remitted or earmarked for remittance.

General Principles | RFC & Branch Gross Philippines Billing Tax

42 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

d. In the event that the TP is married, the EE spouse must

Coverage | Online Carriers likewise comply with the 3 above mentioned requirement to
This is applicable in cases of online international carriers which are FC the tax withheld
engaged in international air transport e. The ER must file an Annual Information Return (1604CF)
f. The ER must issue to the EE BIR Form 2316
Types of International Carriers
International carriers can be offline and online carries (Bar) Always remember the first 4 elements
• Offline Carriers – no landing rights in the PH (BOAC and Air Canada)
• Online Carriers – has landing rights in the PH Suppose:
Note: GPBT will only be imposed on online international carriers Jose is an EE of Roan with a 10k salary. Jose is also a business owner
which had a loss.
Gross Philippine Billings Tax - Tax imposed on Gross PH billings with
a rate of 2.5% Is he required to file an ITR?
Gross Philippine Billings – the amount of revenue derived from the
carriage of persons, excess baggage, cargoes, or mail originating from the Yes. An individual whose income is sourced from BTP is always
PH in a continuous and uninterrupted flight irrespective of the place of required to file an ITR whether there is loss or gain. There is no
issue or the sale of the tickets exemption.

Transshipments | Aliquot Portion 2017 (Bar) | Change of ER

In cases of transshipment (layovers or stopovers) only the aliquot Suppose:
portion of the cost of the ticket corresponding to the leg flown from the Jose in January employed to X Company, he resigned in March
PH to the point of transshipment shall form part of the gross PH billings. because Roan offered him a higher salary.

BOAC Is Jose required to file an ITR?

Tickets were sold here in the PH through a liaison officer. Yes. He is required to file an ITR. He is not qualified for substituted
filing because he must only have 1 ER for the entire taxable year.
Will it be subject to gross PH billings tax?
Suppose:
No, because there is no carriage of passengers or cargoes from the
Jose has an ER. Jose did not earn something from his BTP. The
Philippines. GPBT will only be imposed on GPB which is the amount of
amount due is 5,000 and the amount withheld is 3,000.
revenue pertaining to shipments originating from the Philippines
Is he qualified for substituted filing?
Will it be subject to tax? What type of tax, if any?
No. Since there is a deficiency of 2,000. He needs to file an ITR
NCIT
because the tax due is not equivalent to the tax due and remitted to
the BIR.
XPN on GPBT | Tax treaty
Under a new law, this 2.5% can be reduce to 1.5% or the income can also
Possible (Bar)
be exempt from tax depending on the provision of the Tax treaty b/n the
Suppose:
PH government and the domiciliary country of the airline carrier. Hence,
Jose and Roan are Married. Roan engaged in private practice. Jose
if there is no tax treaty, apply 2.5%. Otherwise, then apply the rate
has been employed by the Government.
indicated in the tax treaty.

Are they qualified?

Filing of Returns and Payment
Roan is not qualified. However, if they will file their return
Requirements for Filing an ITR separately, Jose will be qualified.

Note: There is always a question with respect to Filing of Returns Suppose:

If Jose is in the Government and SLU. Roan is also in the
GR: All Individual TP must file an ITR Government.
XPN:
(1) NRANETB (Stayed for 180 days or less) Are they qualified?

Rationale They are not qualified. Both of them must file.

Corp TP is always subject to 25% FWT based on his Gross Income
Taxation of Married Individuals
Suppose:
Adam of Maroon 5 held a concert in the PH. Requirement
GR: They must file a joint return
What is the tax implication of the tickets sold? XPN: When the filing of the joint return is no longer practicable. Hence,
they have the option to file separately.
He should be subjected to 25% FWT because he is a NRANETB
Taxation of Minors
Who should pay?

Who shall file?

The withholding agent
The guardian shall file, in the name of minor

(2) Substituted Filing
One where the EE will no longer file the return because the ER will
file the return on behalf of the EE.
Requisites | RR 2-2003
a. The EE must be purely compensation income earner
b. The EE should have 1 ER, whether consecutively or
successively during the Taxable Year
c. Tax due should be equivalent to the tax withheld
GR: The income of an unmarried minor derived from the property
received from a living parent shall be included in the return of the parent.
XPN:
(1) When the donor’s tax has been paid on such property;
(2) When the transfer of such property is exempt from donor’s tax.
Suppose:
My son (toddler) is earning through pag-aartista.
Who shall file?

43 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Transfer Tax
The guardian in the name of the minor. Tax to be imposed on the privilege of transferring property gratuitously

If I give a property to my son and it is subject to a lease agreement,
who will report the income earned on the property?
It depends, on whether the donor’s tax has been already paid on such
property for the transfer of the property from the living parent to the
child
The minor through the guardian - if the donor’s tax has already been paid.
Will a transfer tax be imposed on the sale of property?
No. It is subject to income tax, either Normal Tax or CGT depending on
the type of property. However, it will not be subject to transfer tax,
because transfer tax is only imposed upon gratuitous transfers.
Different gratuitous transfers under the NCC
(1) Donation
(2) Succession

The living parent – if the donor’s tax has not been paid
Note:
Under RA 8424, donations made in favor of relatives where in which the
amount is 100,000 or less shall be exempt. But if the donation has been
given in favor of strangers, it is subject to 30% tax.
These are modes of transferring properties gratuitously to another
individual. Hence, these types of transfer shall be subject to transfer tax.
Estate Tax | Definition
Tax on the privilege of transferring a property gratuitously through
succession or after the death of the decedent

This was already amended Types of Donation

a. Donation Inter Vivos –Donation of a property during the lifetime of
Under the TRAIN law, donations whether given in favor of relatives or the transferor. It is subject to Donor’s Tax.
strangers shall be exempt if the donation is 250,000 or less. b. Mortis Causa –Donation of a property upon the death of the
transferor. It is subject to Estate Tax.
Summary of Rules
Nature | Excise Tax
Because it is a tax on the privilege of transferring a property
GR: All individuals must file a return.
XPN:
Governing law
(1) NRANETB
The law applicable at the time of death
(2) Qualified for Substituted Filing
(3) Earned their sole income that is subject to FWT, such as:
‘Death’ is the generating source in the imposition of estate tax based on
a. Interest income derived from bank deposits or deposit
jurisprudence
substitutes
b. Dividend Income
Accrual of Tax
(4) Exempt from income tax shall not be required to file an ITR such as:
Estate tax shall accrue on the time of death.
a. MWE

Note: Accrual of the tax liability is different from the obligation to pay the
Administrative Requirements tax. Because notwithstanding the fact that estate tax shall accrue at the
time of death, the government can dictate the date of payment of tax. In
i. Individual Taxpayers fact, under the TRAIN law, the estate can pay the liability one (1) year
from the date of death.
Coverage
BTP Hence, the last day of payment is reckoned from the date of death,
because death is the generating source for the imposition of Estate Tax.
Annual | When filed?
April 15th of the following year. Article 777 of the Civil Code provides that, all rights, properties or interest
shall be transferred at the time of death. It is by operation of law.
Quarterly | When filed?
Under the TRAIN law:
Suppose:
1Q – May 15
In 2010, Ma’am Tin has a client having an estate tax liability assessed by
2Q – August 15
the BIR amounting to ₱500,000
3Q –November 15

The title over certain properties was named under spouses A & B, B died
It is always 2 months after the close of the quarter
in 1991. Therefore, the properties were inherited by the heirs of B. The
heirs wanted to sell the property.
ii. Corporate Taxpayers

However, under the law, the estate should be settled first before the
Quarter | When filed?
execution of sale. So, they executed a deed of extrajudicial settlement. The
60 days after the close of the taxable quarter
settlement was not accepted by the ROD because the Estate Tax of B was
1Q – 60 days after March 31st
not yet paid. As such, the BIR assessed the Estate Tax of B based on the
2Q – 60 days after June 30th
value of the property in 2010 and not at the time of death in 1991.
3Q – 60 days after September 30th
Further, the BIR applied RA 8424.

Annual | When Filed

Is the BIR correct in using the 2010 valuation?
April 15th of the following year

It is wrong for the BIR to use the 2010 valuation. The valuation to be used
Summary
is the 1991 valuation, because in the determination of the valuation of the
INDIVIDUAL CORPORATE
Estate Tax, the governing law must be the law applicable at the time of
Quarterly 45 days after 60 days after
death.
Annual April 15
The amount of Standard Deduction should also be based on the
ESTATE TAX governing law at the time of death.

After applying the correct valuation, the net estate of B amounted

Basic Principles, Concept and Definition to₱250,000.

Definition and Concept Under RA 8424, net estate in the amount of ₱200,000 or less shall be
exempt.

44 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

However, the governing law at 1991 provides that Net Estate in the
amount of ₱300,000 or less shall be exempt from tax. Hence, the estate of If the property is added to the Gross Estate of A, then the administrator
B is exempted from paying the tax. can deduct. So, determine first if it is part of the Gross Estate of A.

Takeaways In this case, the property is considered as an interest of A but only a

(1) You have to apply the law applicable at the time of death; and portion thereof. When H died, half of the property belongs to the wife and
(2) The property must be valued based on the FMV of the property at half will form part of the distributable estate. The share of A will be then
the time of death 1/3 of the ½ of the FMV of the property

Note: RA 8424 was made effective on January 1, 1998 Hence, he can deduct the amount as a FH deduction.

Doctrines Supporting the Imposition of Estate Note: You do not need to multiply it by 50% because the property is the
exclusive property of A.
Tax

(1) Benefit Received Theory Classification of Decedent

• State can collect taxes because of the services rendered by
government in the distribution of the estate Two types of Decedents
• For the performance of services and other benefits that (1) Resident Decedents (RD) - Resident or Citizen of the PH
accrue to the estate and the heirs, the State can collect taxes (2) Non-Resident Decedents (NRD) - Neither a resident nor a citizen.
(2) State Partnership Theory Hence, he is considered a NRA
• State is a passive and silent partner in the accumulation of the
properties by the estate Differences
(3) Ability to pay theory RESIDENT NON-RESIDENT
• The receipt of inheritance, which is in the nature of unearned DECEDENTS DECEDENTS
wealth, places assets in the hands of the heirs, thereby Properties
Wherever the Only for the properties
creating an ability to pay the tax and thus to contribute to subject to Estate
Tax
property is situated situated in the PH
governmental income
(4) Redistribution of wealth GR: Cannot avail of special
• The receipt of inheritance is a contributing factor to the deductions
inequalities in wealth and income. XPN:
• The imposition of tax reduces the property received by the (1) SD but only in the
Special Can avail of special
successor, thus helping bring about a more equitable amount of ₱500,000;
Deductions deductions
economic environment and
(5) Back Tax (2) Ordinary Deductions
• Taxes that should have been imposed by the government for except Retirement
the services it had rendered Benefits
• Taxes that were not imposed upon the accumulation of the
property Suppose:
A is a Filipino Citizen. She married B, a US Citizen. B died. They have a
Difference between Back Tax and State Partnership Theory property in the PH with a value of ₱1 200,000. A doesn’t have any money
Tax imposed in state partnership theory is in the nature of a privilege tax. left, so A wants to sell the property
The tax imposed in the back-tax theory is in the nature of a back tax
(should have been imposed but was not) Is the Estate required to pay the Estate Tax?

Yes, because the property is located in the PH, whether he is a NRA or a

Valuation of the Gross Estate
RC.
The value of the property at the time of death
Suppose:
BIR told her that she should settle the estate tax first. She was assessed
Definition of FMV
by the BIR, but she doesn’t have enough money to pay the tax. Moreover,
Under Section 60, the higher value between the values prescribed by the
the BIR did not deduct any standard deduction on B’s estate.
BIR which is also called zonal value or the value provided by the city
assessor which is also called assessed value.
Standard Deduction
• RA 8424 – ₱1,000,000
Zonal Value – Value provided in the BIR Website
• TRAIN Law – ₱5,000,000
Assessed Value – Value indicated in the Tax Declaration

Is it correct for the BIR to not deduct any standard deduction on B’s
Personal Properties
Estate?
It will depend on the type of PP
(1) Vehicles and Equipment – an appraisal report coming from an
It depends. If B is a not a resident of the PH, it is proper for the BIR to not
independent proprietor
recognize the standard deduction. Otherwise, B can deduct standard
(2) Shares of Stocks - depends whether the shares is listed or not in the
deduction
PSE
a. Listed – FMV shall be equivalent to the arithmetic mean
(average) between the highest and lowest quotations at the Composition of Gross Estate
date nearest at the date of death, or at the date of death.
b. Not listed– It will depend if it is common shares or preferred Composition of Gross Estate
shares
i. Common shares – Book value Section 85. Gross Estate. - the value of the gross estate of the decedent
ii. Preferred shares – Par value (AOI) shall be determined by including the value at the time of his death of all
(3) Cash - get a certification from the bank of the outstanding balance property, real or personal, tangible or intangible, wherever situated.
at the time of death Provided, however, that in the case of a non-resident decedent (NRD)
who at the time of his death was not a citizen of the PH, only that part
of the entire gross estate which is situated in the PH shall be included
Suppose (Joshua Pascual’s brilliant question): in his taxable estate
H and W have two sons, A and B. The sons got married to C and D. The (A) Decedent's Interest
married sons still stay at the house of their parents. H died. Few years (B) Transfer in Contemplation of Death.
after, A died. (C) Revocable Transfer
(D) Property Passing Under GPA
Can the administrator of A claim FH deduction? (E) Proceeds of Life Insurance
(F) Prior Interests

45 | KAMM Notes

(G) Transfers for Insufficient Consideration (TFIC)
(H) Capital of the Surviving Spouse
To sum up Section 85, all the rights, properties and interests of the
decedent that are existing at the time of death shall be form part of the
gross estate.
Computation of Estate Tax Due
Ma’am Tin’s comments regarding TRAIN Law on Estate Tax
• First, the TRAIN Law provides that the zonal valuation of RP in the
PH shall be increased every after 3 years. If they increased the
Standard Deduction from ₱1,000,000 to ₱5,000,000, apparently,
such has no or it has minimal effect.
• Second, before TRAIN Law, you only need to come up with an
amount of ₱200,000 or less in order to be exempt from tax. Under
the TRAIN Law, you must zero out the net estate.
Suppose:
AA has a property which earns ₱10,000 every month. AA died on June 30,
2018. The taxable period of AA is the calendar year. Under income
taxation, AA shall report the income until the time of death or until June
30. After death, which is from June 1 to December 31, it shall be reported
by either the estate (judicial settlement) or the heirs (extrajudicial
settlement). If the heirs pulled their inheritance, the unregistered
partnership shall report the income
Under income taxation, what if the income from Jan 1 to June 30 had
remained untouched?
The income earned at the time of death, will still become part of the gross
estate, because it is a property existing at the time of death. The income
earned after death, will not become part of the estate because the income
already accrued after death. Therefore, the income thereafter shall be
considered as immaterial.
Suppose:
I bought a raffle ticket on December 21, 2018. I died on January 1, 2019.
The lottery was raffled and I won on January 4.
Will it form part of the gross estate?
No. Since you only consider properties at the time of death. (Post debt
development)
Suppose:
Israel has a client. The decedent died on December 31, 2017. He prepared
the extrajudicial settlement. He acquired a bank certificate in July 2018
for his client’s bank deposits. The bank certified the balance as of July
2018 which was already ₱1,000,000. However, the balance in the bank
as of December 31, 2017 was only around ₱300,000 only.
Is the bank correct in preparing the bank certificate for the
settlement of estate?
The bank is wrong. You only consider the properties existing at the time
of death.
Remedy: Send a letter attaching thereto the provision of the law
Suppose:
I transferred my properties under the name of my children, Yna, Michelle
and Janelle. All the rental payments and possession, however, shall still
belong to me. The BIR discovered the scheme, and I died.
Will the income form part of the gross estate? Who owns the
property?
It will form part of the gross estate. It is called inclusions.
Items to be Included in Determining Gross Estate
(Inclusions)
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Concept
These properties are not registered under the name of the decedent or
not being possessed by the decedent, but it shall form part of his gross
estate.
The Power of Control is the common denominator in inclusions
If the decedent has the power of control over that property at the time of
his death, then you need to include it as part of his Gross Estate,
notwithstanding the fact that the property is not registered under the
name of the decedent.
i. Decedent’s Interest
Interest that has accrued prior to the death of the decedent
Shares of Stocks
Two material dates in issuing stocks are the:
(1) Date of declaration; and
(2) Date of distribution
Suppose:
Assume that the date of declaration is December 31, 2020. The board
resolution states that ₱100,000 shall be declared as dividends of the SH
of the Corp and it shall be distributed on Feb 1, 2021. AA died on January
10, 2019.
Will the ₱100,000 form part of the gross estate?
Yes. It will form part of the gross estate, because at the date of declaration,
the SH will already acquire a right on the dividend. That is also why, the
final tax on the dividend income will accrue at the date of declaration.
ii. Transfer in Contemplation of Death
“In contemplation of death” does not pertain to the general expectation of
dying rather it simply means that the controlling motive for the transfer
of the property is the thought of dying.
The imminence of death is just a convincing evidence but it is not a
determining factor. The situation given with respect to Yna, Michelle and
Janelle is considered as transfer in contemplation of death
Books
Transfer with retention of interest shall be classified as transfer in
contemplation of death.
“Transfer with retention of interest” is where the transferor will retain the
enjoyment or the power or control, or the power to designate who shall
enjoy the property
Therefore, the properties that had been transferred shall still form part
of the gross estate
iii. Revocable Transfers
One where the transferor has the power to alter, modify or revoke the
transfer made to another individual.
Stipulated Period to Revoke
Whether or not exercised, it is still considered as revocable transfer.
Suppose:
In a deed of reconveyance, I am transferring the property to Jovy. In that
deed, I stated that I have the power to revoke the transfer within 10 years.
I died before the lapse of the 10-year period and without revoking.
Will the property form part of the Gross Estate?
The property will still remain as part of my gross estate, notwithstanding
the stipulated period, as long as the deed indicates that the transferor has
the right to revoke, then the transfer will still be considered a revocable
transfer.
iv. Property Passing under a General Power of Appointment
GPA – One where in which the decedent has the right to designate the
person or persons who shall enjoy or possess a certain property of a prior
decedent
46 | KAMM Notes

Suppose:
A has a property. In a deed of donation or conveyance, A stipulated that B
shall have the right to designate the persons who shall enjoy the property
of A when A dies. A died.
Will the property be transferred to B?
No. He has only the right to designate but he has no right with respect to
ownership
Is this a property passing under the GPA?
Yes. Hence, it shall be included in the gross estate of B, because B has the
control over the property because of the GPA.
Will the property, registered under the name of A, form part of the
gross estate of B, if B died?
Yes, because B has control. Upon A’s death, he can designate himself as
the beneficiary of the property. This is a transfer through GPA.
What if it was designated that it shall designate A Jr., B Jr., or B
himself? Is this GPA or SPA?
Still GPA, because B still has control over the property in such a way that
he can designate himself as the beneficiary.
What if B is not included in the list? Will it be included in the Gross
Estate of B?
No, because this is already a SPA and not a GPA, because B doesn’t have
any choice but to either designate A Jr. or B Jr
v. Proceeds of Life Insurance
See previous discussion
(Bar) Suppose:
A company insured the life of Noel. Noel indicated in the policy that the
beneficiary shall be his parents. Noel died.
Will the proceeds of life insurance be part of the income tax?
No. It is not subject to income tax. If the beneficiary is the company, the
proceeds shall not be subject to tax.
Section 32B does not make any qualification as to who the recipient of
the policy is, as long as it is in the nature of a proceeds of a life insurance
policy then it will be excluded in the gross income under Section 32B
Will the premium payments be part of the income tax?
It depends. If the beneficiary is the EE or his heirs, it is considered as a
taxable income on the part of the EE. If the beneficiary is the ER, it cannot
be considered as a taxable income on the part of the EE because no
benefit will redound in favor of the EE.
Will the proceeds form part of the estate of Noel?
GR: Proceeds of the life insurance will form part of the estate if the
designation is revocable. Because of his control at the time of his death.
XPN: If the designation is irrevocable, he has no longer control over the
life insurance policy. Hence, the proceeds will no longer form part of the
gross estate.
XPN to XPN: The proceeds will form part of the gross estate, even if the
designation is irrevocable, provided that the beneficiary is the estate or the
administrator of the estate in his official capacity.
Designation is silent
GR: If the designation is silent, the designation is revocable.
XPN: If the designation is silent, but the right to revoke has not been
exercised during the term of the policy, the nature of the designation is
irrevocable.
Suppose:
I designated Michelle as the beneficiary in a revocable life insurance
policy. I died without exercising the right to revoke.
Will the proceeds form part of the gross estate?
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
No. It will not form part of the gross estate, because the right to revoke
was not exercised.
Suppose:
I designated Michelle as the beneficiary, then I changed it to Yna, then I
changed it to Michelle again.
Will the proceeds form part of the gross estate?
Yes, because the right to revoke has been exercised
Summary
• For income taxation, the proceeds of the life insurance policy are
exempt from income tax under Section 32B, because proceeds
represent an indemnity for the loss of life of an individual.
• For estate taxation, proceeds of life insurance will form part of the
gross estate of the decedent, if the designation of the beneficiary is
revocable or if there is an irrevocable designation but the
beneficiary is the estate or the administrator in his official capacity,
then the proceeds shall form part of the estate.
• In the determination of revocability, remember the amendment
of the Insurance Code of the PH, if the right has not been exercised,
it shall be treated as irrevocable. If the designation is revocable,
determine if the revocation was exercised. If he exercised, it is
considered as irrevocable
Note: If the beneficiary is silent, the beneficiary is the heirs of the
decedent and not the estate.
vi. Prior Interest
These are interest that had accrued prior to the death of the decedent.
vii. Transfer for Insufficient Consideration (TFIC)
Definition
A transfer of property for a consideration which is not adequate. It will
only be considered a TFIC, if it is not a bona fide sale.
Exemption | Bona fide Sale, Arm’s Length
If the sale has been entered into an arm’s length or has been made into an
arm’s length, then it is considered as a bona fide sale, hence, it shall not be
considered as TFIC.
TFIC is when FMV is higher than the Gross Selling Price (GSP)
GR: If the FMV of the property is greater than the GSP, it will be deemed
as TFIC.
XPN: Not unless it can be shown that:
(1) That the transfer is a bona fide sale; or
(2) That the sale is made at arm’s length.
TFIC is NOT applicable to sale of RP-CA
Suppose:
FMV of a car is ₱1,000,000. I sold it for ₱200,000. Hence, there is a loss of
₱800,000.
Is the transaction subject to tax?
The difference between the FMV and GSP shall be subject to Donor’s Tax
or Estate Tax (depends upon when the transfer shall take effect).
Suppose:
FMV of the lot is ₱1,000,000. I sold it for ₱200,000. Hence, there is a loss
of
₱800,000
Is the transaction subject to tax?
Tax implication depends on the classification of the RP. If I undervalue a
RP-OA, I can evade the tax based on Normal tax.
Sale of RP-CA
Suppose:
If I undervalue a RP-CA, I cannot evade the tax, because CGT based on GSP
or FMV, whichever is higher.
Will the difference between the GSP and FMV be treated as TFIC?
47 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

No, it will not be treated as TFIC because the law excludes sale of RP-CA e. The collectible or receivable must be part of the Gross Estate
from the imposition of Donor’s Tax or Estate tax when the property is (in case of accommodation law)
sold for less than its FMV
‘Accommodation loan is one where a debtor obtains a loan for the
PALGIC v. SOF and CIR benefit of another individual

The shares of PhilamLife have been sold for less than its FMV. The FMV is Suppose:
₱3,000,000. It was sold for ₱1,000,000 A obtained ₱1,000,000 loan from B. The loan is given to C. A died.

Is the difference subject to Donor’s Tax?
Yes, SC ruled that the difference between the FMV and GSP shall be
subject to Donor’s because PhilamLife was not able to prove that the sale
was a bona fide sale.
Can A treat the ₱1,000,000 as deduction from his Gross Estate
in case he dies?
Yes, provided that the collectible or receivable must be included as
part of the Gross Estate.

Allowable Deductions from Gross Estate Suppose:

X and Y owned a parcel of land with a FMV of ₱5,000,000. They
Ordinary Deductions [VIT2ALS] obtained a loan from BDO in the amount of ₱2,000,000. They paid
(1) Casualty Losses ₱1,000,000. X died. The administrator of the estate of X paid the
(2) Indebtedness (claims against Estate or Insolvent persons) balance of ₱1,000,000. When he paid the balance, the administrator
(3) Unpaid Taxes was paying the share of Y with respect to the unpaid obligation.
(4) Transfer for Public Use
(5) Amount received under RA 4917 How much is the Gross Estate?
(6) Vanishing Deduction
(7) Share of Surviving Spouse ₱2,500,000 only. The payment was made after death. Post-debt
developments are immaterial in the valuation of the Gross Estate.
Special Deductions Hence, the only property existing at the time of debt is the
(1) Standard Deduction ₱2,500,000 land. The ₱500,000 receivable accrued after death, so
(2) Family Home (FH) you do not consider it as part of the Gross Estate.

i. Ordinary Deductions How much is the Claims against the Estate?

(a) Casualty Loss
Requisites for Deductibility
(1) When it arises from TRECUSO (Theft, Robbery, Embezzlement and
other Casual and Unusual Sudden Occurrence)
(2) It must not be compensated by insurance (Quiz)
(3) It must not be claimed as a deduction for income tax purposes (The
TP cannot benefit twice from the same loss)
(4) The loss should have been incurred not later than the last day for
the payment of the estate tax (Quiz)
Last day for payment of Estate Tax
1 year from the date of death
(b) Indebtedness
(1) Claims against the Estate
The creditor is the third person
Requisites for Deductibility [VERG]
a. Valid and subsisting obligation
b. The obligation must be Existing at the time of death
c. The obligation must be Reasonable in amount
d. It must have been entered into in Good faith
Unpaid Mortgage
e. FMV of the property used to secure the obligation must be
included as part of the Gross Estate (in case of unpaid
mortgage)
(Bar) Suppose:
A had a property and he used the property in order to secure his
loan obligation from B. A died. A used the unpaid amount as a
deduction from his gross estate. BIR disallowed such amount as
deduction because it discovered that the FMV of this mortgage has
not been included as part of the gross estate.
₱500,000 only. You only consider half of the obligation, because the
other half is not X’s obligation but rather Y’s obligation.
Post debt developments
These are payments made after death. Post debt developments are
immaterial in the valuation of the Gross Estate
You do not consider the payment after death.
(2) Claims against Insolvent person (Quiz)
The creditor is the Estate
Definition
It pertains to obligations extended by the decedent during his
lifetime to an insolvent person. The concept is the same as bad
debts.
Who is an “Insolvent Person”?
Under RR 12-2018, “insolvent person”, for estate tax purposes,
must be in harmony with the definition of “insolvent person” under
FRIA.
If the debtor is considered as an insolvent person under FRIA, then
the decedent can treat such obligation of such insolvent person as
a deduction from the Gross Estate. So, the administrator or
executor of the decedent’s estate can treat the claims against the
insolvent personas a deduction.
Suppose:
A owes B ₱100,000. B died. At the time of death of B, A has a total of
₱100,000 in assets and ₱200,000 in liabilities.
Can B deduct the ₱100,000 debt?
No. He can only deduct ₱50,000 which is the proportional amount
with respect to A’s Asset and Liabilities.

Is the disallowance correct? (c) Unpaid Taxes

Yes. Although it is classified as claims against the estate which only Requisites for deductibility
required four requisites of deductibility, RR 12-2018 had an (1) The tax should have accrued prior to the death of the decedent
additional requisite, such that the FMV of the mortgaged property (2) The tax should be unpaid at the time of death of the decedent
must have been included as part of the gross estate.
(d) Transfer for Public Use
a. Asd
b. Asd
c. Asd
d. Asd

Accommodation Loan
Requisites for deductibility

48 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

(1) The transfer of the property must be through testamentary
succession
(2) The property must be exclusively for public use
(3) The transfer must be for the use of the government or any of its
political subdivisions
(e) Amount received under RA 4917 (Retirement Law)
RA 4917 is the retirement law
The amount of retirement benefits can be considered as deduction from
the gross estate provided that the retirement benefits shall first be
included as part of the Gross Estate.
(f) Vanishing Deduction aka property previously taxed
Note: This is not applicable in Donor’s Tax
Is vanishing deduction applicable to the Estate of Assunta
Asuncion? Explain (4%)
Alternative Answer – It shall be allowed because the act of filing of the
return shall be considered as payment of the tax. Hence, vanishing
deduction shall be allowed.
Ma’am Tin does not agree.
The purpose behind the imposition of the tax is to alleviate the impact of
transfer tax upon the same property. There is no imposition of transfer
tax because the transaction is exempt from the payment. Hence, we
cannot equate filing of the tax as payment of the tax. In the first place,
Section 56 of the Tax Code provides that the tax must be paid at the time
the return is filed. It does not state that the filing of the return is equivalent
to the payment of the tax.

Reason behind the grant of this deduction Applying the principle of Strictissimi Juris. That if there is an ambiguity as
For the purpose of computing the estate tax due. In order to alleviate (or to the particular requisite, we must construe it against the TP. Hence, of
ease) the impact of the transfer tax imposed upon the same property. the law states that there must be payment. There has to be actual
payment of either Estate Tax or Donor’s Tax, in order to serve the
When shall it be granted? purpose of granting vanishing deduction which is to alleviate the impact
It will be granted if the date of death of the present decedent occurred of tax
within 5 years from the date of the death of a prior decedent, or when the
date of death of the present decedent transpired within 5 years from the Important values in vanishing deduction
date of donation. (1) Initial Basis -The valuation of the gross estate of the decedent
(2) Final Basis -Initial basis less certain deductions
Sample Situation:
I donated a property to Francis, the value of which is ₱1,000,000. Period to % ratio
Based on the time elapsed from the 1st transfer to the 2nd transfer:
Is it subject to tax?
Period Percentage
1 year or less 100%
Yes, Donor’s Tax.
More than 1 year up to 2 years 80%
More than 2 years up to 3 years 60%
After 1 year, Francis died. Will the transfer of the property from
More than 3 years up to 4 years 40%
Francis to its heirs be subject to tax?
More than 4 years up to 5 years 20%
Yes. It is subject to Estate Tax. Note: Vanishing deduction is not applicable to a period of more than 5
years
The 2nd transfer must be subjected to Estate Tax
The 1st transfer must be either Donor or Estate Tax. But the 2nd transfer (Bar) Suppose:
must be Estate Tax. On January 1, 2019, A died. B is the only heir. On January 1, 2021, B died.
Both A and B’s estate are subject to Estate Tax, because the 2nd transfer
Requisites for deductibility is not a part and parcel of the 1st transfer. Both transfers are by operation
(1) The date of death of the present decedent or the donee, in cases of of law.
donation, must happen within 5 years from the date of death of the
prior decedent or from the date of donation Can the estate of A avail of vanishing deduction?
(2) The property must be situated in the PH
(3) The property must be identified as one of the properties included Yes, because the two transfers occurred within the 5-year period. The
in the Gross Estate of the prior decedent, or the gross gifts of the date of death of the present decedent occurred within 5 years from the
donor date of death of the prior decedent.
(4) The Estate Tax or Donor’s Tax must have been paid
(5) There must be no vanishing deduction that has been previously How much shall be the amount of vanishing deduction?
availed of for the same property
The amount of vanishing deduction shall be equivalent to 80%. The
transfers occurred within 2 years. Hence, only the 80% of the final basis
2008 (Bar)
can be used as a vanishing deduction.
Suppose:
While driving his car to Baguio last month, Pedro Asuncion, together with
What if B died on Jan 17, 2019?
his wife Assunta, and only son Jaime, met an accident that caused the
instantaneous death of Jaime. The following day, Assunta also died in the
The amount of vanishing deduction shall be equivalent to 60% of the final
hospital. The spouses and their son had the following assets and liabilities
basis.
at the time of death:

Suppose:
A didn’t die, rather, A donated a property to B on Jan 1, 2017, then B died
on Jan 1, 2019.

Can the estate of B avail of vanishing deduction?

Yes, because what is mandatory under the law is that the 2nd transfer
shall be subject through succession. The 1st transfer can either through
How much is the Estate of Jaime? Explain (4%) donation or through succession.

The gross estate of Jaime is ₱1,200,000. He died before the effectivity of (g) Share of Surviving Spouse
the TRAIN Law. Hence, deduct ₱1,000,000 as Standard Deduction. The
net estate of Jaime is ₱200,000. However, the amount is considered as Amount
exempt from Estate Tax because net estate in the amount of ₱200,000 Share of surviving spouse is equivalent to ½ of the Net Estate after
and below shall be exempt from the payment of Estate Tax. Conjugal Ordinary Deduction.

Deductions before arriving at the Net Estate

49 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

You need to deduct VIT2ALS from the community property before you
arrive at the net estate, then you get the share of the surviving spouse.
You only need to consider Ordinary Deduction
You only need to consider Ordinary Deduction (Conjugal) and not Special
Deductions in order to arrive at the Share of the Surviving Spouse
1254 were essential to the distribution of the property to the persons
entitled thereto. Hence, the attorney's fees incurred in the guardianship
proceedings in the amount of 50 000 should be allowed as a deduction
from the gross estate of the decedent
Is this still applicable under the current law?

Conjugal ordinary deductions - If this deduction shall be sourced from the No. Under the TRAIN Law, Judicial Expenses such as the fees
community or conjugal property of the spouses abovementioned are no longer considered as deduction.

Suppose: ii. Special Deductions

The decedent obtained ₱1,000,000 loan secured by the Exclusive
Property of the decedent. The community property is ₱5,000,000 and Two kinds of special deductions
Exclusive property is ₱1,000,000. (1) Family Home
(2) Standard Deduction
Where will we deduct the ₱1,000,000 from?
(a) Standard Deduction
Deduct it from the exclusive property because the obligation is source out
of the exclusive property of the decedent. RA 8424 TRAIN Law
₱1,000,000 ₱5,000,000
Note: If the problem is silent, the obligation is presumed as a Conjugal NRD can now avail SD but only
NRD cannot avail of any SD
Ordinary Deduction. Hence, it will be sourced from the Community in the amount of ₱500,000
property
(b) Family Home
Chismis:
In 2015. The estate tax liability was huge, they thought of questioning the Requisites of Deductibility
manner of computation made by the BIR: (1) The property must be the dwelling place of the decedent
(2) There must only be one FH
(3) In order to establish that the decedent resides in such property the
administrator must secure a certificate from the Punong Barangay
certifying that the decedent is a resident of the place where the
property is located
(4) The decedent must either be a wife, husband or a head of the family
• It is not necessary that the decedent is a married individual
(5) The limitation as to the amount shall be equivalent to the FMV of
Is the computation correct?
the property or the decedent’s interest whichever is lower but not
exceeding ₱10,000,000
No. Because you shall not consider Special Deductions (Family Home and
Standard Deductions) in the computation of the share of the surviving
spouse Suppose:
There is a ₱1,500,000 FH, which is owned by the decedent.
What is the correct computation?
If the property is the exclusive property of the decedent, how much
is the deduction?

The whole amount of ₱1,500,000

If the property is the community property, how much is the

deduction?

CIR v. CA and PAJONAR
G.R. No. 123206, 22 March 2000
Judicial Expenses is no longer considered as a deduction under the TRAIN
Law
Pedro Pajonar was part of the infamous Death March in which he
suffered insanity. His sister became his guardian over his person while
PNB is his guardian over his property. He died in 1988. PNB did not file
an ETR, instead it advised his heirs to execute an extrajudicial settlement
and to pay the taxes on his estate. The Estate paid ₱2,557. Pursuant to a
second assessment, BIR assessed deficiency taxes in the amount of
₱1,527,790.
May the notarial fee of ₱60,753 and the attorney's fees of ₱50,000
be allowed as deductions from the gross estate?
Yes. However, deduction is limited to such administration expenses as
are actually and necessarily incurred in the collection of the assets of the
estate, payment of the debts, and distribution of the remainder among
those entitled thereto.
The notarial fee of ₱60 753 was incurred primarily to settle the estate of
the deceased Pedro Pajonar. Thus, the notarial fee of ₱60 753 incurred
for the Extrajudicial Settlement should be allowed as a deduction from
the gross estate.
Only ₱750,000 because the interest of the decedent, which is only half of
the community property, is lower than the FMV of the property
Note: This is under RR 12-2018 and not under the TRAIN Law
(c) NRD Deductions
NRD Deductions [VIT2LS]
Deductions that can be availed of by a NRD
(1) Casualty Losses
(2) Indebtedness
(3) Unpaid Taxes
(4) Transfer for Public Use
(5) Vanishing Deduction
(6) Share of Surviving Spouse
Note: All kinds of OD can be availed of by the NRD except that of the
amount received under RA 4917 (Retirement benefits)
LIT shall be ratably deducted (First three on the list)
Remember, that in so far as LIT are concerned, the entire amount shall
not be deductible, but only the ratable portion thereof
It is equivalent to the % of the gross estate located within (PH) that bears
over the gross estate outside the PH (worldwide). Hence, the formula is
GE(PH)/GE(WW)

Attorney's fees, on the other hand, in order to be deductible from the Exclusions from Gross Estate and Exemptions of
gross estate must be essential to the settlement of the estate. The
attorney's fees incurred in the guardianship proceeding in Spec. Proc. No.
Certain Acquisition and Transmissions

50 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

i. Exclusive Property of Spouses No, because this is just part and parcel of the 1st transfer which is already
subject to Estate Tax. That is why the merger of the usufruct in the owner
The exclusive property of the decedent shall be part of his Gross Estate. of the naked title is not subject to Estate Tax.
However, the exclusive property of the surviving spouse shall not be part
of the decedent’s estate. iii. Transmission or delivery of the inheritance or legacy by the
Fiduciary Heir to the Fideicommissary
Other terms for Exclusive Property
Wife – ‘Paraphernal Property’ The Fiduciary Heir is the instituted heir and has the duty to preserve and
Husband – ‘Capital Property’ transfer the property to the next heir, who is called the Fideicommissary.
Their relationship must be within one degree.
Governing Property Regime
• Married on August 3, 1988 - Absolute Community of Property Suppose:
• Married prior to August 3, 1988 In the will of A, he mentioned that his land shall be transferred to B who
GR: Conjugal Property of Gains will preserve the property and when C reaches the age of majority, then
XPN: Pre-nuptial agreement. B shall transfer the property to C, or it shall be transferred in the event
that B dies
Exclusive Properties under Absolute Community Regime
Suppose: If A dies, the property will transfer to B, as a fideicommissary. It is subject
King and Yna got married in 2018. King had ₱500,000 before marriage. to Estate Tax.
Yna had ₱10,000,000 before marriage. They accumulated ₱4,000,000
during the marriage. Yna Died. If B dies, it will transfer to C, pursuant to the will of A. It shall not be subject
to Estate Tax because this is just part and parcel of the 1st transfer which
What shall form part of the Gross Estate of Yna? is already subject to Estate Tax.

₱10,000,000 of Yna, ₱500,000 of King, and the ₱4,000,000 they earned What if the degree of relationship is not one degree?
during marriage. It must be included in full.
It is still considered as an Exclusion, because it is a transmission of the
What if they got married in 1985, and King died? legacy from the 1stheir to the 2nd heir

₱500,000 shall be added to King’s Gross Estate, and the ₱4,000,000 they iv. Transmission of the Legacy from the 1stheir to the 2nd heir
earned. However, the ₱10,000,000 of Yna shall not be included because
it is the exclusive property of Yna. Degree of relationship is immaterial but it has the same concept above.

Donated Properties during Marriage | Exclusive v. Bequest, Devise or Legacies

Shall not form part of the Conjugal Property of the spouses. It shall be
considered as exclusive property of one of the spouses. Bequest, devise or legacies transferred to social welfare or charitable
institution or NSNP institution. Such transfer will only be considered as
Suppose: excluded, if the recipient is a
Yna and King earned ₱1,000,000 each prior to their marriage. They (1) NSNP institution and
earned an accumulated amount of ₱2,000,000 thereafter. The father of (2) That not more than 30% of the bequest, devise or legacy shall be
Yna donated a property to her worth ₱4,000,000. King died. At King’s used for administrative purpose.
death the property donated to Yna already worth ₱6,000,000
vi. Benefits by reason of Social Legislation
How much is the Gross Estate of King?
Any benefits received from SSS, or GSIS shall be considered as exempt
₱4,000,000, only. The property donated to Yna is her exclusive property. from Estate Tax.

ii. Merger of the Usufruct in the Owner of the Naked Title Tax Credit for Estate Taxes paid to a Foreign
Country
Definition
A situation where the owner of the naked title and the usufruct is vested i. Foreign Estate Tax Payments
on the same individual.
Compared with Income Taxes
It must be pursuant to a will of a prior decedent FITP can be considered as tax credit for income tax purposes.
It will only be considered as an exclusion if the merger is pursuant to the • Provided that the TP will indicate it in his return, otherwise, it will
will of a prior decedent be considered as tax deduction

Suppose: Foreign Estate Tax Payments

A has a property. In the will of A, he stipulated that the usufruct over a It will always be considered as tax credit regardless of WON the TP
parcel of land shall belong to B and the naked title shall belong to C. In the indicates it in his return. There is no option in the first place.
same will, A mentioned that in the event B dies, the usufruct shall belong
to C ii. Reciprocity Rule

In the usual course of events, without the provision of the transfer of the To whom shall it be applicable?
usufruct to C, if A died, and then B died, the heirs of B will inherit the This is only considered if
property. However, because A indicated that in the event that B dies, the (1) The decedent is a NRD
usufruct shall belong to C, the transfer from B to C is not by virtue of the (2) NRD owns an intangible personal property
provision of the law, but by the will of B. Hence, the 2nd transfer is part (3) The intangible personal property must be located in the PH i.e.
and parcel of the 1st transfer. shares of stocks, copyright and franchise.

Will the 1st transfer to B be subject to Estate Tax? If there is no reciprocity rule, and the NRD owns an intangible property
in the PH, it shall be subject to tax. However, since our laws provides for
Yes, if a transfer has been made gratuitously through succession, it shall reciprocity rule, then this particular transaction has a possibility of being
be subject to Estate Tax. exempted from tax.

What if B dies, will the transfer from B to C be subject to Estate Tax? When shall it be considered exempt?
There is an exemption in the transaction if the domiciliary country of the
NRD grants transfer tax exemption in favor in favor of Filipino Citizens
not residing in that domiciliary country

51 | KAMM Notes

Situs
(1) Real Property – where the RP is located
(2) Franchise – where the franchise is exercised
(3) Copyright – where the book has been published
(4) Shares of stocks – it depends on the issuer
a. Issued by DC – within
b. Issued by RFC
i. S/S within
1. There is a branch located here in the PH you
automatically consider it as a RFC; or
2. If 85% or more of the operations of the RFC is
situated in the PH
ii. All others - outside
c. Issued by NRFC - outside
Administrative Requirements
Under the TRAIN Law, there are only two administrative requirements:
1. Filing of Estate Tax Return (ERT); and
2. Filing of Statement or Certificate from a CPA
Due Date in filing the Administrative Requirements
1 year from the date of death. (Same as payment)
Extension
It can be extended for a period of 30 days upon meritorious cases.
The application for extension must be done prior to the lapse of the
1-year period.
Location of filing
At the last place of residence of the decedent. The location is seen at the
death certificate. However, this is a rebuttable presumption through a
certification from the Punong Barangay where the decedent resides.
Effect of filing it at the wrong revenue district office
The tax due is subject to 25% surcharge
If Decedent is a NRA or NRC
It shall be filed where the ExecAd is registered. If he is not
registered, it shall be filed at the legal residence of the ExecAd. If
there is no ExecAd, it shall be filed at the Office of the Commissioner,
RDO 39, located at Quezon City.
In sum, the location shall be based on:
1. Last place of residence of the decedent;
2. Where the ExecAd is registered (If the Decedent is a NRA or NRC)
3. Legal residence of the ExecAd (If ExecAd not registered)
4. Office of the Commissioner at RDO 39 – Quezon City (Absence of
ExecAd)
Where should the ExecAd secure the TIN of the Estate?
At the place where the ETR shall be filed
Where should the tax be paid?
At the place where the ETR shall be filed
When should the tax be paid?
At the time the ETR is filed
Extension in payment
(1) Judicial Settlement of Estate – Payment could be extended up
to 5 years from the lapse of the 1-year period to pay
(2) Extrajudicial Settlement of Estate – Payment could be
extended to 2 years from the lapse of the 1-year period to pay
Showing of undue hardship as requisite
In cases of extension, the ExecAd must show undue hardship on the
part of the heirs to settle the Estate Tax Liability.
Posting of Bond
The CIR may require the posting of bond not double the amount of the
Estate Tax Liability
Interest
Prior to the TRAIN Law: The tax due shall no longer subject to 25%
surcharge provided that the application shall be approved by the BIR.
However, it shall be subject to 12% interest.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Under the TRAIN Law: ExecAd or Heirs are allowed to pay in
installments in cases of insufficiency of cash, which is not subject to
surcharge and interest.
Requirements for installment payments
(1) The application must be filed before the lapse of the 1-year
period submitting proof that there is insufficiency of cash.
(2) The ETR must indicate the frequency of payment i.e. monthly,
quarterly, or yearly.
Provided that the installment payment period will not go beyond 2
years. Otherwise, the entire amount shall be due and demandable
after the lapse of the 2-year period.
Persons Liable
The ExecAd shall be primarily liable
The Heirs are merely subsidiarily liable
i. Filing of Estate Tax Return
When is the ETR required?
Two instances:
(1) When the transfer is subject to Estate Tax or;
(2) The Estate has registered or registrable properties
Untitled Land
An untitled land is a registrable property.
Suppose:
A parcel of land valued at ₱100 000 is untitled. The owner died.
Is the filing of ETR required?
Yes, even if the property is only ₱100 000, because the property or
estate has registrable properties.
Shares of Stocks
Shares of stocks is also a registered or registrable property
In fact, the Corporation cannot transfer the Stock Certificate to the
buyer not unless the buyer will submit a certificate authorizing
registration. The Certificate is only issued when the TP files an ETR.
Transfer subject to tax
“Transfer subject to tax” means the actual payment and not the accrual.
Suppose:
The only properties are pieces of jewelries worth ₱5,000,000. Jewelries
are not considered as registrable or registered properties.
Is the filing of ETR required?
It depends on whether there will be payment of estate tax liability. In this
case, there the administrator is not required to file an ETR because there
is no payment of estate tax due because the Net Estate is equivalent to
zero after deducting the ₱5,000,000 Standard Deduction.
What if the jewelries are worth ₱6 000 000?
Assuming that the jewelries are worth ₱6,000,000, the administrator is
required to file an ETR because the net estate will now be equivalent to
₱1,000,000 after Standard Deduction of ₱5,000,000. Hence, there will
already be a payment of Estate Tax Liability.
ii. Filing of Statement or Certificate from a CPA
The Statement or Certificate must contain
• Itemized Assets
• Itemized Deduction
• Amount of Estate Tax Due
When is the Certification required?
The certification is required if the Gross Estate exceeds ₱5,000,000. If it is
exactly ₱5,000,000, the statement is no longer necessary.
Qualifications of the CPA
It is not necessary that the CPA has an accreditation coming from the
Board of Accountancy. The statement does not need to be in the form of
an auditor’s report. It is only needed to be an inventory
52 | KAMM Notes

iii. Electronic Certificate Authorizing Registration (ECAR) and
Withdrawal of Cash from Bank Accounts
If the Heirs, Admin or Exec will withdraw from the bank account of the
decedent without the submission of an ECAR, the amount to be
withdrawn shall be subject to 6% FWT.
(Bar) Suppose:
Ma’am Tin’s client has 13 RP, 8 vehicles and 8 Cash Accounts. When her
husband died, Ma’am Tin advised her to withdraw all the cash from their
bank accounts before the bank managers find out that her husband died.
Otherwise, the bank managers will freeze the entire account. Under BSP
Regulations, even if the accounts are “or” accounts, the accounts shall be
frozen entirely. The bank will only unfreeze the accounts upon
submission of an ECAR evidencing that the Estate Tax Liability with
respect to that bank account has already been settled by the heirs.
Prior to the TRAIN Law:
ECAR must be submitted to access the bank accounts
For purposes of Bank Accounts there has to be an ECAR submitted to the
Bank Manager.
Bank Accounts are part of the Estate
If Bank Accounts are the only ones left in the Estate, a filing of ETR is still
required because these are part of the registered or registrable
properties.
Under the TRAIN Law:
The heirs can now withdraw from the Bank Accounts
The Bank will no longer freeze the account of the decedent but the
withdrawal of such amount shall be subject to tax depending on the time
of withdrawal.
Withdrawal within the 1-year period
No ECAR is required, but the amount shall be subject to 6% FWT
Withdrawal beyond the 1-year period
Submission of an ECAR is mandatory, however, the amount is no longer
subject to 6% FWT. Rather, it is subject to 6% Estate Tax provided that
the Net Estate is not zero (of course).
The payment of the FWT is in Lieu of all other tax liabilities
Hence, upon the filing of the ETR, the Bank Accounts shall be excluded
from the Gross Estate
Suppose:
The client only has ₱5 000 000 worth of cash.
Should you advise to withdraw the amount from the bank?
No, because the ExecAd can claim Standard Deduction of ₱5 000 000. The
Net Estate will be equal to ₱0, hence, there would be no tax due
Partial Disposition of Estate
One where the TP would pay the Estate Tax Liability partially. The TP can
settle the Tax Liability with respect to the portions of the Estate.
e.g., The client would not like to pay the 6% FWT, and would only like to
ask for an ECAR with respect to some of his bank accounts to settle them.
It must be done prior to the lapse of the 1-year period.
Marcos II vs. CA
GR No. 120880, June 5, 1997
The Marcos family was assessed by the BIR after it failed to file ETRs.
However, the assessment was not protested by Mrs. Marcos and the heirs
of the late president. Hence, the assessment became final and
unappealable after the period for filing of opposition has prescribed.
The failure to file an ETR, and the subsequent failure to contest or appeal
the assessment made by the BIR is fatal to the petitioner's cause. Under
Section 223 of the NIRC, in case of failure to file a return, the tax may be
assessed at any time within 10 years after the omission, and any tax so
assessed may be collected by levy upon real property within 3 years
(now 5 years) following the assessment of the tax.
Since the estate tax assessment had become final and unappealable by
the petitioner's default as regards protesting the validity of the said
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
assessment, there is no reason why the BIR cannot continue with the
collection of the said tax
CIR v. Pineda
G.R. No. L-22734, September 15 1967
On 1945, Atanasio Pineda died and survived by his heirs. Estate
proceedings were had before the CFI. After the estate proceedings were
closed, the BIR investigated the income tax liability of the estate for the
years 1945, 1946, 1947 and 1948 and it found that the corresponding
ITRs were not filed.
Manuel Pineda (heir) claimed that he is only liable for the unpaid income
tax due on the estate up to the extent of and in proportion to any share he
received
Can Manuel only pay the tax in proportion to the share he received?
The Government can require Manuel to pay the full amount of the tax
assessed.
Pursuant to the last paragraph of Section 315 of the Tax Code, If any
person, corporation, partnership, joint-account (cuenta en participacion),
association, or insurance company liable to pay the income tax, neglects
or refuses to pay the same after demand, the amount shall be a lien in
favor of the Government from the time when the assessment was made
by the CIR until paid with interest, penalties, and costs that may accrue in
addition thereto upon all property and rights to property belonging to the
TP.
By virtue of such lien, the Government has the right to subject the
property in Pineda's possession, i.e., the ₱2,500, to satisfy the income tax
assessment in the sum of ₱760.
Note: The Government has two ways of collecting the tax in question:
(1) By going after all the heirs and collecting from each one of them the
amount of the tax proportionate to the inheritance received; and
(2) By subjecting said property of the estate which is in the hands of an
heir or transferee to the payment of the tax due, the estate. This
second remedy is the very avenue the Government took in this case
to collect the tax
Lorenzo v. Posadas
G.R. No. 43082, 18 June 1937
The accrual of the inheritance tax is distinct from the obligation to
pay the same
Section 1536 as amended, of the Administrative Code, imposes the tax
upon "every transmission by virtue of inheritance, devise, bequest, gift
mortis causa, or advance in anticipation of inheritance, devise, or
bequest." The tax therefore is upon transmission or the transfer or
devolution of property of a decedent, made effective by his death.
It is in reality an excise or privilege tax imposed on the right to succeed to,
receive, or take property by or under a will or the intestacy law, or deed,
grant, or gift to become operative at or after death. According to Article
657 (now Art. 777) of the Civil Code, "the rights to the succession of a
person are transmitted from the moment of his death." The property
belongs to the heirs at the moment of the death of the ancestor as
completely as if the ancestor had executed and delivered to them a deed
for the same before his death
Plaintiff, however, asserts that while Article 657 (now Art. 777) of the
Civil Code is applicable to testate as well as intestate succession, it
operates only in so far as forced heirs are concerned. But the language of
Article 657 (now Art. 777) of the Civil Code is broad and makes no
distinction between different classes of heirs. That article does not speak
of forced heirs; it does not even use the word "heir". It speaks of the rights
of succession and the transmission thereof from the moment of death.
Whatever may be the time when actual transmission of the inheritance
takes place, succession takes place in any event at the moment of the
decedent's death. The time when the heirs legally succeed to the
inheritance may differ from the time when the heirs actually receive such
inheritance
Dizon v. CTA
G.R. No. 140944, May 6 2008
53 | KAMM Notes

Whether the actual claims of the creditors may be fully allowed as
deductions from the gross estate of Jose despite the fact that the said
claims were reduced or condoned through compromise agreements
entered into by the Estate with its creditors.
We express our agreement with the date-of-death valuation rule, made
pursuant to the ruling of the U.S. Jurisprudence.
First. There is no law, nor do we discern any legislative intent in our tax
laws, which disregards the date-of-death valuation principle and
particularly provides that post-death developments must be
considered in determining the net value of the estate. It bears emphasis
that tax burdens are not to be imposed, nor presumed to be imposed,
beyond what the statute expressly and clearly imports, tax statutes being
construed strictissimi juris against the government. Any doubt on
whether a person, article or activity is taxable is generally resolved
against taxation.
Second. Such construction finds relevance and consistency in our Rules
on Special Proceedings wherein the term "claims" required to be
presented against a decedent's estate is generally construed to mean
debts or demands of a pecuniary nature which could have been enforced
against the deceased in his lifetime, or liability contracted by the deceased
before his death.
Therefore, the claims existing at the time of death are significant to, and
should be made the basis of, the determination of allowable deductions.
Gabriel v. CA & Ronquillo
G.R. No. 149909, October 11 2007
Petitioners are heirs of late Atty. Gabriel, who was designated as the
executor of the will of deceased Ronquillo. Respondents are heirs of
Ronquillo
While still acting as executor, Atty. Gabriel, with prior approval of the
probate court, sold three parcels of land. Due to certain disagreements
between Atty. Gabriel and the respondents, a portion of the proceeds in
the amount of ₱1,422,000 was deposited with the probate court. The said
sum included the compensation of Atty. Gabriel. Allegedly, to prevent the
release of the compensation, respondents filed a notice with the probate
court that there was a pending tax investigation with the BIR concerning
unpaid taxes of the estate from the sale of the land.
The probate court can rightfully take cognizance of the unpaid taxes of
the estate of the deceased; if the estate is found liable, the probate court
has the discretion to order the payment of the said taxes.
Petitioners should bear in mind that the right to appeal is not a natural
right or a part of due process. It is merely a statutory privilege, and may
be exercised only in the manner and in accordance with the provisions of
the law. The party who seeks to avail of the remedy of appeal must
comply with the requirements of the rules; otherwise, the appeal is lost.
Rules of procedure are required to be followed, except only when, for the
most persuasive of reasons, they may be relaxed to relieve the litigant of
an injustice not commensurate with the degree of his thoughtlessness in
not complying with the procedure prescribed.
DONOR’S TAX
Basic Principles, Concept, and Definition
Animus Donandi
Intent to donate or animus donandi is a requisite for the Taxability of the
Donation provided that the gift is considered as a direct gift.
Not applicable to Indirect Gifts
Note that ‘intent to donate’ is not applicable in cases of indirect gifts
Amount
If it is within the ₱250 000 exempt donation, then it is not subject to
Donor’s Tax.
Taxable period
Entire calendar year from January to December
Cumulative Basis
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Donations made from the previous months during the same calendar
year shall still be reflected in the Donor’s Tax Return for which the
present donation is reported.
Period of filing of the return
The return must be filed within 30 days from the date of donation. The
date of donation shall be reflected in the deed of donation.
Relationship/Status is immaterial
The donation shall be exempt or be subject to tax even if the donee is a
stranger or a relative. All donations regardless of the status or
relationship of the donor and donee, shall be subject to 6% Donor’s Tax
in excess of ₱250,000 for each calendar year
Suppose:
I am fond of giving ₱100,000 to my favorite student. I gave ₱100,000 to
Yna in January 17, ₱100,000 to Michelle in June 12 and ₱100,000 to
Jessica in October 14.
In the month of January, do I need to pay tax?
No, because the donation does not exceed ₱250,000. The cumulative
amount of the donation is only ₱100,000. The donor’s tax return should
be filed on February 16.
In the month of June?
No, because the donation does not exceed ₱250,000. Note, that the gross
gifts that shall be reflected in the donor’s tax return is ₱200,000, because,
the donations made during the same calendar year shall still be reported.
Gross gifts shall be reported on a cumulative basis. The donor’s tax return
shall be filed on July 12.
In the month of October?
Yes, because the total donation for the calendar year already exceeds
₱250 000. The cumulative amount of the gross gifts is already ₱300 000.
Hence, the ₱50 000 excess shall be subject to 6% Donor’s Tax. Note,
another donor’s tax return shall still be filed on November 13.
Splitting of Donation Scheme
Remedy where the donor would defer the delivery of the gift until the
next taxable year, if the cumulative donation for the current taxable year
already exceeds ₱250 000.
Requisites of a Valid Donation
Requisites | Valid Donation under the NCC
(1) Capacity to Donate
• A minor or an unborn child can receive a gift. Only, the
capacity of the donor is material
• A paramour cannot receive a gift
• Spouses cannot receive gifts from each other, except
moderate gifts in case of family rejoicing.
• Otherwise, the transfer of the property by an incapacitated
person is void.
(2) Acceptance
(3) Public Instrument (Notarized)
If the property donated is a RP, it must be notarized. Otherwise,
noncompliance will be considered as void.
Requisites | Taxability of the Donation
(1) Capacity of the Donor
(2) Animus Donandi
(3) Delivery
(4) Acceptance
Delivery
As a general rule, the only requirement is that the donee accepts the
gift in the same or in a separate instrument.
For tax purposes, delivery is likewise a requisite for the taxability of
the donation.
Under present RR 12-2018, for it to be considered a taxable
donation, the donation must be a completed gift. Hence, there must
be a delivery.
Voidable Donations | Taxable
54 | KAMM Notes

If the donation is only voidable, the donation is still subject to gift taxation
Transfers which may be considered as
Donation
Indirect Gifts
(1) Condonation of Indebtedness
(2) TFIC (Section 100)
(3) Waivers
(4) Renunciation of Indebtedness
a. Condonation of Indebtedness
Condonation of indebtedness may be by reason of the rendition of
service, out of pure generosity or when the shares of SH may be
condoned by a Corporation.
Tax Implication
Rendition of service is a remuneratory donation. The amount of obligation
condoned is subject to Income Tax because it is treated as if it has been
used to pay off the services.
Pure Generosity. Gifts, bequests and devises are excluded from the Gross
Income and therefore exempt from Income Tax. However, it is subject to
Donor’s Tax because it considered as a gratuitous transfer.
Corporation condoned the obligation of the SH. It shall be considered as a
declaration of dividends. The condonation of the indebtedness shall be
subject to 10% FWT
Transfer for Insufficient Consideration
Definition
Transfer for less than the adequate consideration because it is a transfer
which is less than its actual FMV
Transfers must be made during the lifetime of the transferor
Any difference between the GSP and FMV shall be considered as a gift.
Hence, it shall be subject to Donor’s Tax provided that it shall take effect
during the lifetime of the transferor.
Otherwise, if the transfer shall take effect after the death of the transferor,
then the difference shall be subject to Estate Tax.
It shall not apply to sale of RP-CA
Under the TRAIN Law, if the transfer has been made in the ordinary
course of business, where it is considered as a bona fide sale, or has been
made at arm’s length, or it has been made without donative intent, then
the sale will not be considered as a TFIC, but a sale of RP-CA (subject to
6% CWT based on the GSP or FMV, whichever is higher)
Presumption under RA 10963 | Bona fide Sale
However, if the seller cannot show that the sale is a bona fide sale or has
been made at arm’s length (absence of duress or a transaction on an
equal footing), and free from donative intent, then the presumption
under the law is that, such sale is considered a TFIC.
PALGIC v. SOF and CIR
G.R. No. 210987, November 24, 2014
Bona fide sale or at Arm’s Length in the absence of Donative Intent
Petitioner PhilamLife used to own 498,590 shares in PhilamCare.
PhilamLife, in a bid to divest itself of its interests in the HMO industry,
offered to sell its shareholdings through competitive bidding. Thus,
Petitioners’ shares were sold to STI Investments, Inc
After the sale was completed and the DST and CGT were paid, PhilamLife
filed an application for a certificate authorizing registration/tax clearance
with the BIR to facilitate the transfer of the shares. Months later,
petitioner was informed that it needed to secure a BIR ruling due to
potential donor’s tax liability.
In compliance, PhilamLife requested a ruling to confirm that the sale was
not subject to donor’s tax, pointing out, in its request, the following:
• that the transaction cannot attract donor’s tax liability since there
was no donative intent
• the shares were sold at their actual FMV and at arm’s length
• that as long as the transaction conducted is at arm’s length – such
that a bona fide business arrangement of the dealings is done in the
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
ordinary course of business––a sale for less than an adequate
consideration is not subject to donor’s tax; and
• that donor’s tax does not apply to sale of shares sold in an open
bidding process.
In 2012, CIR denied PhilamLife’s request. It claimed that the selling price
of the shares thus sold was lower than their book value based on the
financial statements of PhilamCare. CIR held that the donor’s tax became
imposable on the price difference pursuant to Sec. 100 of the NIRC viz:
SEC. 100. Transfer for Less Than Adequate and full Consideration. Where property,
other than real property referred to in Section 24(D), is transferred for less than an
adequate and full consideration in money or money’s worth, then the amount by which
the fair market value of the property exceeded the value of the consideration shall, for
the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included
in computing the amount of gifts made during the calendar year.
In view of the foregoing, the CIR ruled that the difference between the
book value and the selling price in the sales transaction is taxable
donation subject to a 30% donor’s tax under Section 99(B) of the NIRC
Is the transaction subject to Donor’s Tax?
The price difference is subject to donor's tax
Petitioner's substantive arguments are unavailing. The absence of
donative intent, if that be the case, does not exempt the sales of stock
transaction from donor's tax since Sec. 100 of the NIRC categorically
states that the amount by which the FMV of the property exceeded the
value of the consideration shall be deemed a gift. Thus, even if there is no
actual donation, the difference in price is considered a donation by fiction
of law
Waivers
Definition
The transferor will transfer his interests or inchoate right over a
particular property
Illustration:
Property has not yet been partitioned and a co-owner would like to
transfer his interest in favor of another individual. This is a waiver
because what is being transferred is merely an inchoate right over the
property.
Renunciation
Coverage | Shares in the Inheritance
Only applicable to shares in the inheritance.
Renunciation v. Waiver
Waiver –You already accepted the inheritance when it was transferred.
Renunciation –There was no acceptance at all. It is more on the refusal.
‘Right of accretion’ is when an heir renounces his share in the inheritance
in favor of the other heirs.
Two Types of Renunciation
(1) Specific Renunciation – one where the heir renounces his
inheritance in favor of one or some of the heirs
(2) General Renunciation – one where the heir renounces his
inheritance in favor of all the remaining heirs
Only ‘Specific Renunciation’ is subject to Donor’s Tax
General Renunciation is exempt from Donor’s Tax because it is by
operation of law, or by reason of the right of accretion. That is what the
law states.
Suppose:
Cory Aquino died. Kris Aquino renounced her share in favor of PNoy.
What is the tax implication?
The renunciation is a specific renunciation. Hence, the transfer is subject
to Donor’s Tax.
What if Kris Aquino renounce her share in favor of all of her
siblings?
55 | KAMM Notes

The renunciation is a general one. Hence, the transfer is exempt from
Donor’s Tax.
Rules on renunciation will not apply to conjugal shares (Quiz)
The rules will only apply if it involves renunciation of the share of the
inheritance. Hence, the rules will not apply if the renunciation is with
respect to the conjugal share.
Suppose:
Prior to the TRAIN Law, H & W owns a property valued at ₱3,000,000.
The parents wanted to transfer the properties in favor of their 3 children.
Is it better to donate the property?
No. If the property is donated, it will be subject to around 8-15% donor’s
tax (the rate prior to TRAIN Law). To lessen the tax impact, it is better if
they wait for their parents to die in order for them to apply Standard
Deduction on their Gross Estate.
(Bar) Suppose:
After H died, will it be economically wise for W to just donate the
property to her children?
No. The rules of renunciation will only apply to the shares in the
inheritance. It will only apply to ¼ of the Gross Estate of H, because ½ of
the property is the conjugal share of W. The rules of renunciation cannot
be applied to the conjugal property because it is not considered as a share
in the inheritance. Hence, the ½ conjugal share shall be subject to Donor’s
Tax and only ¼ shall be exempt, which is the proper subject of the general
renunciation.
Suppose:
J is the only son of A and B. B has four other children (B1 to B4) with
different women (WTF!). A & B are not married. Exclusive properties of
A were acquired from the parents of A through a Deed of Sale (and not
through inheritance). In the title, it was stated that A is married to B. B
died. The counsel of B was asked by the BIR to execute a deed of
extrajudicial settlement in order to transfer the property under the name
of J. The other siblings signed the settlement with renunciation of their
share in the inheritance
What type of renunciation was executed?
It depends on how the counsel couched the stipulations under the deed
of extrajudicial settlement. If the provision states that “B1 will renounce
his inheritance in favor of J”, it is considered as specific renunciation.
Hence, it is subject to Donor’s Tax. If the provision states that “B1 will
renounce his inheritance in favor of all other heirs”, it is considered as a
general renunciation. Hence, the latter is exempt from Donor’s Tax.
Classification of Donor
Types of Donor
(1) Resident Donor
Resident or citizen of the PH
(2) Non-Resident Donor
Neither resident nor citizen of the PH. Hence, a non-resident alien.
Tax Implication
Same rules with respect to Estate Tax
Deductions/Exemptions from Gift Tax
Note: Under the TRAIN Law, dowry deductions had already been
removed.
(1) Donations given to educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited
NGO, trust or philanthropic organization or research
institution or organization
Provided, that (1) not more 30% of the donation is used for
administrative purposes and (2)the institutions must be NSNP
Chismis:
ABS-CBN usually donates for natural disaster victims. It donates
₱10,000,000 to Sagip-Kapamilya Foundation and not directly to
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
individuals. Note that Sagip-Kapamilya is a foundation under ABS-
CBN.
Why would ABS-CBN donate it to an institution and not
directly to the victims?
By reason of deductions. The victims are not qualified recipients.
Sagip-Kapamilya is an Accredited NGO or a DC Social Welfare
Institution. Since donations made to accredited NGOs are
considered as allowable deductions. It will not pay taxes.
Benefits under Donor’s Tax
Section 101 deals with the list of donations exempt from Tax
a. If the donations are given directly to the Government for
public purpose, it shall be exempt.
b. If the donations are given to NSNP, provided that not more
than 30% of the donations are not used for administrative
purpose, then it shall also be exempt.
(Bar) Suppose:
What if the donation has been made in favor of a Proprietary
Educational Institution and it will use the property for
educational purpose, will the transfer be exempt from
Donor’s Tax?
No. It will not be exempt from Donor’s Tax because under Section
4(4), Article XIV of the 1987 Constitution, it has a condition which
states that ‘x x x…subject to the limitation set by Congress, grants,
endowments, donations, ADE use for Educational Purpose shall be
exempt from tax’. The conditions are:
a. Not more than 30% of the donation shall be used for
Administrative Purpose and;
b. The institution must be NSNP
(2) Gifts made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government;
Provided, that it is used exclusively for public.
Note: A GOCC i.e., a water district, is not included in the list,
however, it can still be exempt from such tax because it is an entity
created by any of the National Government agencies. (Quiz)
(3) Gifts amounting to ₱250,000 and below
Under the TRAIN Law, only gifts in excess of ₱250,000 in each
calendar year, shall be subject to 6% Donor’s Tax.
Hence, if the cumulative gifts amount to ₱250,000 and below, it
shall be exempt from tax
Tax Treatment of Political Contributions
Exempt from Donor’s Tax
Political Contributions are exempt provided that there is compliance
with the reportorial requirements under the Omnibus Election Code.
Abello, et al. v. CIR
G.R. No. 120721, February 23, 2005
Political Contributions Exempt | Reportorial Requirements
Are the political contributions received by the political candidates
and party lists considered gifts?
Political contributions are gifts because it complied with the three
requisites of donation:
(1) Increase in the patrimony of the recipient
(2) Decrease in the patrimony of the giver or donor; and
(3) Animus Donandi
Pending decision, Congress enacted RA 7166 Omnibus Election Code.
Under the Code, political contributions are already exempt from Donor’s
Tax.
However, even if the Code has taken effect, it will only apply to those
donations made after the effectivity of the said Code. All donations given
prior, shall still be subject to Donor’s Tax.
56 | KAMM Notes

RR 8-2009
Re: Creditable Withholding Tax
Political Candidates or Party Lists are Withholding Agents
Under RR 8-2009, political candidates or party lists are mandated to
withhold the taxes from the income payments made to their suppliers
using the funds from political contributions.
Reportorial Requirement | Statement Contribution
The donation given to a political candidate/party list will not be subject
to Donor’s Tax, provided he shall submit a statement contribution before
the COMELEC.
Suppose:
Arce will run as Mayor in Vigan. Ma’am Tin donated ₱1,000,000 to him
Is the donation subject to Donor’s Tax?
No. Provided that he will comply with the reportorial requirements
provided under the Omnibus Election Code i.e., to submit statement
contributions before the COMELEC.
Suppose:
Arce will use it for t-shirts with his big face on it. Arce hired Janelle to
manufacture these shirts. Arce will use the money donated by Ma’am Tin
for its payment to Janelle
Will Arce be considered as a Withholding Agent?
Yes. Arce will be a withholding agent with respect to the income earned
by the supplier, Janelle, from the manufacture of the shirts. Hence, instead
of paying Janelle the whole ₱1 000 000. Arce will withhold 5% or 10%
tax, as the case may be.
What if Arce did not withhold the tax?
The payment will still not be subject to Donor’s Tax. However, as a
consequence, Arce will be liable as a withholding agent.
Filing of Return and Payment
Period to file
It must be filed within 30 days from the date of donation
Payment of tax
It must be paid upon filing of the Donor’s Tax Return
Notice of Donation| Gifts more than ₱50,000 for AD
GR: Under RR 2-2003, Notice of Donation is not required
XPN: If the Donor will utilize the donation as an Allowable Deduction
from the Gross Income. Provided, that the gift must me more than ₱50
000.
Note: Remember the ABS-CBN Case with respect to the donation given
to Sagip-Kapamilya.
Failure to file a notice of donation | Compromise Penalty
Failure to file a notice of donation will not prevent the TP to claim
allowable deduction. The only consequence is that the TP shall be subject
to compromise penalty
VALUE-ADDED TAX
Nature and Characteristics of VAT
ABAKADA Guro v. Exec. Secretary
G.R. No. 168056, September 1, 2005
Constitutionality of VAT
Issues:
1. 70% Cap on Creditable Input VAT
2. 60-month Amortization
3. 5% Government Final VAT on Creditable Input VAT
4. VAT as vested right or a mere privilege
5. Progressivity of Tax and Regressivity of VAT
Ruling:
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
All of the arguments are without merit.
1. 70% Cap on Creditable Input VAT
Section 8 of R.A. No. 9337 imposed a 70% limitation on the input tax.
Thus, a person can credit his input tax only up to the extent of 70% of the
output tax.
In computing the VAT payable, three possible scenarios may arise:
First, if the output taxes charged by the seller are equal to the input taxes
that he paid and passed on by the suppliers, then no payment is required
Second, when the output taxes exceed the input taxes, the person shall be
liable for the excess, which has to be paid to the BIR; and
Third, if the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters. Should the input taxes
result from zero-rated or effectively zero-rated transactions, any excess
over the output taxes shall instead be refunded to the TP or credited
against other internal revenue taxes, at the TPs option.
2. VAT is a mere privilege
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-registered
person’s entitlement to the creditable input tax is a mere statutory
privilege.
Hence, the right to credit input tax as against the output tax is a privilege
created by law, a privilege that also the law can remove.
3. 60-month Amortization is just a delay but no deprivation
Petitioner’s argument that the TP is permanently deprived of his
privilege to credit the input tax is without merit.
The 60-month period only imposes a spread out method, and it only
poses a delay in the crediting of the input tax, but not a deprivation of his
privilege to credit the input tax.
4. 5% Government Final VAT is proper
If a TP transacts with the government, the transaction will be subject to
5% Final VAT. The withholding of such 5% will already extinguish the
TP’s VAT liability
Suppose:
If the TP transacted with the Gov’t for services exclusive of VAT in the
amount of ₱10,000, the VAT is ₱1,200. The Government will withhold 5%
of the amount based from the gross receipts. The Gov’t will treat it as a
Final payment of the VAT liability.
The Gov’t will withhold ₱500. Hence, there is a difference of ₱700.
Therefore, Gov’t will pay TP ₱10,000 + ₱700.
If TP has an input VAT of ₱800 (from his purchase to another), he can no
longer use it because its payment of 5% Final VAT extinguished the TP
VAT liability.
Standard Input Vat (SIV)
SIV is the 5% Final VAT withheld by the Gov’t. The 7% difference is left
by the Gov’t because it treats it as payment for the input VAT that had
been acquired by the TP which can no longer be used.
Petitioners now questioned the law because they can no longer use the
Input VAT entitled to them
• If the amount of SIV is less than the actual amount of input VAT
acquired by the TP, it is considered as an expense/cost on the part
of the TP. (Subject to Allowable Deduction)
• Otherwise, it will be considered as an income. (Subject to Income
Tax)
Under the TRAIN Law: Beginning end of 2019, the Final VAT is now
considered as Creditable VAT. Hence, it will extinguish the liability, it will
only be considered as advance payment.
5. Regressive System is not prohibited, only frowned upon
57 | KAMM Notes

Petitioners contend that because VAT is a regressive form of tax system,
it shall be unconstitutional.
Progressive system of taxation: Imposition of Tax in consideration of the
ability to pay of the TP.
Regressive system of taxation: It does not consider the income of TP,
rather it applies an equal imposition of tax.
Court conceded that VAT is a regressive system of taxation. However, this
system is not prohibited under the constitution. As a clarification, the
Constitution only prefers the imposition of the progressive system of
taxation. The regressive system is only frowned upon but not prohibited,
to wit: “The Congress shall ‘evolve’ a Progressive System of Taxation”
Tax on Value Added
It is imposed only on the value added of a TP.
“Value added” is the difference between total sales of the TP and his total
purchases for the same period subject also to VAT
Sales Tax
The TP (seller) determines his tax liability by computing the tax on the
GSP or gross receipts (output tax), and subtracting or crediting the VAT
on the purchase (or importation) of goods or services (input tax) against
the tax due on his own sale.
VAT rate: 12% standard rate; 0% on certain sales or transactions
VAT base: GSP or gross receipts
VAT is a Business Tax
It is a tax imposed on the privilege of having business
VAT is a cumulative tax
It is imposed on every stage of the distribution process i.e., supply of raw
materials, manufacture, retail, wholesale, etc. pursuant to an Executive
Order. Before its enactment, it was just a single stage process.
VAT is an Ad Valorem Tax
VAT is based on the value of the products sold
Tax on Consumption
Scope of VAT
(1) Sale, Barter, Lease or Exchange (SBLE) of goods or properties made
in the Ordinary Course of trade or business; or
(2) Importation of products regardless of whether or not in the
ordinary course of trade or business
VAT is a consumption tax imposed at every stage of the distribution
process on (i) the sale, barter, exchange, or lease of goods or properties,
(ii) rendition of services in the course of trade or business, and (iii) the
importation of goods, whether or not such imported goods are for use in
business. [Sec. 4.105-2, RR 16-2005]
Indirect tax: Impact and Incidence of Tax
Direct Tax v. Indirect Tax
Direct Tax – burden of tax cannot be shifted to another individual
Indirect Tax - by operation of law, the burden of tax can be shifted to
another individual
‘Incidence of Tax’ is also called ‘Burden of Tax’
‘Impact of Tax’ is the ‘Tax Liability’
Note: Only ‘burden of tax’ can be shifted to the consumer, never the ‘tax
liability’
Suppose:
CGT is imposed on sale of RP-CA. The seller shall pay for the CGT.
However, the parties can stipulate that the buyer shall pay for the CGT.
Is CGT a direct or indirect tax?
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
It is a direct tax. Absence any stipulation to pass or transfer the payment
of tax to the buyer, the seller cannot shift the burden to the buyer.
Suppose:
Prior to a purchase of a Happy Meal, you cannot have an agreement with
McDonalds on transferring the VAT, because that is the privilege given to
McDonalds to shift the burden to the end-consumer. Thus, VAT is an
indirect tax.
In both cases:
(1) It is erroneous to conclude that the tax liability is being shifted. In
both cases, only the ‘burden of tax’ is being shifted to the consumer
(2) In cases of direct taxes, it is erroneous to conclude that the ‘burden
of tax’ cannot be shifted, because the ‘burden of tax’ can still be
shifted but must be upon the stipulation of the parties.
Otherwise, it will violate the principle of autonomy under the NCC,
because parties are free to stipulate as long as it is not contrary to law. In
this case, there is no prohibition under the Tax Code prohibiting the
shifting of the ‘burden’ of direct tax to another individual.
Suppose:
X Corp purchased products from Y Corp. Y Corp shifted the VAT to X Corp.
Hence, X Corp paid the VAT. Later, X Corp realized that the transaction is
a Zero-Rated transaction. Therefore, it should not have been subjected to
VAT. Hence, X Corp filed for a refund for the VAT it paid. BIR denied the
claim, because X Corp is not the proper person to claim for refund.
Is the BIR correct?
Yes. X Corp is not the statutory TP. Under the law, the statutory TP must
file the claim for the refund. In this case, Y Corp is the income earner.
Hence, Y Corp must file the claim for refund. Y Corp shifted the ‘burden’
to X Corp but not the tax liability. Hence, Y Corp remains to be the
statutory TP.
This is based on the case of Silkair v. Petron:
The remedy is for Silkair to ask Petron to file a refund, because Silkair
does not have any personality to do so. Assuming that Petron successfully
claimed a refund from the BIR, but it refuses to give it to Silkair, Silkair has
a cause of action against Petron because under the law, Petron will only
hold it in trust for Silkair. Hence, Silkair can demand for the amount it paid
to Petron.
Philippine Acetelyne v. CIR
17 August 1967
As compared to CIR v. Gotamco
PHA sold goods to VOA and NPC, PHA did not pay the sales tax because
VOA and NPC are exempt tax. BIR assessed PHA for the deficiency tax on
the sales transactions.
PHA claims that VOA and NPC are exempt from tax, therefore it shall not
be held liable for sales tax.
Note: Sales tax is now a form of VAT.
Is PHA liable for sales tax?
PHA should be liable for sales tax, because what is only being shifted is
the ‘burden of tax’ and not the ‘tax liability’. What the purchasers have
paid was part of the purchase price, hence, what the purchasers paid was
not the tax.
Even if VOA and NPC are exempt from tax, PH cannot claim tax exemption
for the sales tax
Note: At the present time, the amended charter of NPC already contains a
provision stating that all individuals or corporations dealing with NPC
with respect to the generation of electric power shall likewise be exempt
from tax.
CIR v. GOTAMCO
27 February 1987
GOTAMCO had a transaction with WHO. WHO is exempt from Direct and
Indirect Taxes, including constructor’s tax. GOTAMCO did not pay
constructor’s tax because it alleges since WHO is exempt from tax then it
should not be held liable as well.
58 | KAMM Notes

Note: Constructor’s tax is the same as VAT.
Is GOTAMCO liable for tax?
Under the Host Agreement, there is an express provision that individuals
and corporations transacting with the WHO shall be exempt from any
form of tax. All individuals and entities contracting with WHO with
respect to the construction of the WHO building shall be likewise exempt
from tax.
Case Comparison | PH ACETELYNE v. GOTAMCO
The difference lies with the provision under the Host Agreement.
PH Acetelyne: The Charter of NPC does not include a provision that
persons or corporations dealing with NPC shall likewise be exempt from
any form of tax. The international agreement entered into between the
US and PH does not contain any provision that all individuals transacting
with VOA shall likewise be exempt from tax.
Gotamco: Under the Host Agreement, there is an explicit provision that
all individuals transacting with WHO with respect to the construction of
the building shall likewise be exempt. Hence, GOTAMCO is exempt from
tax.
Effectively Zero-Rated Transaction
Under the present law, these principles are still applied. The transactions
between WHO and GOTAMCO are called ‘Effectively Zero-Rated
Transaction’
‘Effectively Zero-Rated Transaction’ is where the TP entered into an
agreement with an entity exempt from indirect tax where a special law
or international agreement effectively subjects the transaction to a 0%
rate.
Proviso
It will effectively subject the transaction to a 0% rate if the special
law or international agreement contains an express provision
exempting the seller from the payment of the indirect tax.
In the PH Acetelyne case, the transaction cannot be considered as
effectively zero-rated transaction, because the charter and the
international agreement did not contain a provision likewise exempting
the seller from tax.
CIR v. American Rubber
29 November 1966
American Rubber is engaged in the production of Rubber. CIR assessed
American Rubber for its sales transaction. It paid under protest. Later it
claimed for refund.
BIR claimed that American Rubber cannot file a claim for refund because
it separately itemized and billed the sales tax in its invoice, and it
stipulated that the sales tax was to be paid by the consumers, and not by
American Rubber.
Is American Rubber entitled to refund?
American Rubber is not entitled to refund
Remember: The sales tax is by law imposed directly, not on the thing sold,
but on the act of selling by the manufacturer, producer or importer, who
is exclusively made liable for its timely payment.
First point: When American Rubber had placed ammonium of the latex
raw material, it would only be for the purpose of preserving the product
for one month. It is considered as a ‘simple method of preservation’.
Hence, it shall still be considered as selling of agri-product in its original
state.
However, under RA 9337, this is no longer applicable. At present, only
sale of agri ‘food’ product sold in their original state shall be exempt from
tax.
Second point: In this case, it must be the seller who must file for the claim
for refund, and if granted, then the seller will just hold the money in trust
for those who had paid the tax. So, if the purchaser had paid for the tax
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
liability, then the seller is just merely holding the money in trust for the
purchasers.
Suppose:
Michelle is a farmer. Ma’am Tin is the reseller of Michelle’s goods through
a mobile application. Everyone in class ordered cabbages from Ma’am
Tin.
Is it subject to VAT?
No, because the products are still in their original state.
What if Ma’am Tin sells the agri-food products, but are already
chopped and packaged?
Under the TRAIN Law, this is considered as a concept of simple process of
preservation i.e., simple processes of smoking, broiling, packing, etc.
Thus, it is still considered as a sale of agri-products in their original state.
How about marinated products i.e., tocino?
No, these are no longer considered as simple preservation.
Suppose:
Ma’am Tin went to a restaurant and ordered fresh salad, the ingredients
was in their original state.
Is it subject to VAT?
Yes, because you are purchasing restaurant service and not the goods
alone.
CIR v. Sony
G.R. No. 178697, 17 November 2010
The subsidy is not subject to VAT but subject to Income Tax
Sony PH (SPH) incurred advertising expense. SPH is a subsidiary of Sony
Singapore (SSG). Remember, that a subsidiary is a separate entity
compared to a branch. Hence, SPH and SSG are two different entities.
When SPH was in dire financial loss, SSG paid for the advertising expense
of the former through a subsidy. BIR assessed the subsidy for VAT.
Is the subsidy subject to VAT?
The subsidy is not subject to VAT. SPH never rendered any service nor
delivered any goods to SSG. Under the VAT system, VAT will only be
imposed if there is a SBLE of goods or services in the ordinary course of
business.
However, the fact that it is not subject to VAT does not mean that it will
not be subject to Income Tax, because the subsidy is still considered a
flow of wealth. Hence, subject to Income Tax.
Conclusion:
An income is not always subject to VAT, because for it to be subject to
VAT, there must be a:
(1) SBLE of goods or services; and
(2) Such transaction must be in the ordinary course of business.
Tax Credit Method
Under the VAT method of taxation, which is invoice-based, an entity can
credit against or subtract from the VAT charged on its sales or outputs
the VAT paid on its purchases, inputs and imports. [CIR v. Seagate, G.R.
No. 153866 (2005)].
The VAT payable is the excess of output tax over input tax:
Excess Input VAT | Carry Over or Refund
If input VAT is higher than output VAT, the excess input tax is carried over
to the succeeding taxable quarter/s as tax credit. However, any input tax
attributable to zero-rated sales may instead be refunded or credited
against other internal revenue taxes.
Destination Principle and Cross-Border
Doctrine
59 | KAMM Notes

(1) Destination Principle – VAT or any business tax will only be
imposed on goods consumed in the PH
(2) Cross Border Doctrine – No VAT shall be imposed on goods
consumed outside the PH
GR: The VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. Goods and services are taxed only in the
country where they are consumed. Thus, exports are zero-rated, while
imports are taxed.
XPN: Zero-rated services under Sec.
Persons Liable to VAT
Threshold Amount | ₱3,000,000
Under the TRAIN law, the entity must earn a total of ₱3,000,0000 in Gross
Sales or Receipts in order to be considered a VAT registered entity.
Scope of VAT
(1) Sale, Barter, Lease or Exchange (SBLE) of goods or properties made
in the Ordinary Course of trade or business; or
(2) Importation of Products
• Regardless of WON in the ordinary course of trade or business
Ordinary Course of Business
‘Ordinary Course of Business’ means that there is regularity or
continuity of the transaction. It should not be isolated in nature.
Isolated Transactions are exempt
Isolated transaction shall not be subject to VAT (CIR v. Magsaysay Lines)
Incidental activities are subject to VAT
Under R.A. No. 9337, activities incidental to the main line of activity shall
be subject to VAT.
Suppose:
A has a building in Session Road for lease as a commercial space. One of
his sources of income is the collection of garbage fees and parking fees.
Are these fees subject to VAT?
Prior to R.A. No. 9337, these are not subject to VAT, because these are
activities that are incidental to the main line of business i.e., leasing.
Hence, only the payment from lease contracts shall be subject to VAT.
However, under R.A. No. 9337, these fees are now subject to VAT, because
activities incidental to the main line of business shall now be subject to
VAT.
Investment in Real Property (Quiz)
If the sale was recorded in the books of the corporation as an investment
in real property, it had been classified as a capital property. Thus, the
property is considered as not used in the ordinary course of business.
Properties considered as PPE
Under RR 7-2003, if a property has been included as part of PPE of the
corporation, it will be consideredas an OA (CIR v. Mindanao II
Geothermal)
Property being used by one of the SH (Quiz)
Under RR 7-2003, if the property is being occupied by one of the SH of the
corporation or one of its corporate officers, the property will be
considered as an OA
• Even if the property was classified as an ‘investment in RP’.
(Bar) Suppose:
Hotel vis-à-vis Rent-a-Car
A hotel has a rent-a-car business. The rent from the car business shall be
subject to tax because all incidental transactions shall now be subject to
VAT.
(Bar)
Gymnastics | Geared for Profit
Suppose:
Members of the club will pay monthly dues used to maintain the club
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Is the payment subject to VAT?
No. Because the collection has not been made in the ordinary course of
Business. It was collected in order to maintain the club.
However, if it was geared for profit, the collection shall be subject to VAT
because it was already made in the ordinary course of business.
Note: If the collected amount is more than the necessary expense for the
maintenance of the club, then it shall be considered as a collection for
profit.
(Bar)
Homeowner’s Association
In a subdivision/condominium, there is a common area for the residents
or owners. To maintain these common areas, it is required under the law
that there is a Homeowner’s Association. The association is in charge to
maintain and therefore it collects dues from the owners or residents.
Will association dues be subject to VAT?
No. Because it has not been made in the Ordinary Course of Business.
Yamane v. Lepanto
G.R. No. 154993, October 25, 2005
Homeowner’s Association maintenance | Not engaged in business
The LGU was collecting Local Business Taxes from the Homeowner’s
Association. The association questioned the act of collection as they
claimed that they are not engaged in any business, that they are just
collecting the dues in order to maintain the area.
Are they liable for local business tax?
No, since Homeowner’s Associations are not engaged in business.
Homeowner’s Associations are created by law in order for them to
maintain the common areas of a subdivision or condominium project.
Hence, all the dues shall not be subject to local business tax, because they
are neither in the ordinary course of business nor incidental thereto.
Note: The ruling can be used in order to justify that it should not likewise
be subject to VAT, because VAT is in the nature of a business tax.
CIR v. Magsaysay Lines
G.R. No. 146984, July 28 2006
Boat | Isolated Transaction
Prior to the enactment of R.A. No 9337, NDC was into a privatization
project. By reason of such project, it was forced to sell its vessels i.e., boats.
It was sold in a public bidding. Magsaysay Lines was declared as the
winning bidder. NDC is not engaged in chartering vessels nor in real
estate transactions.
Is the sale of the vessels subject to VAT?
The sale has not been made in the ordinary course of business. Hence, it
is not subject to VAT. The transaction is merely an isolated transaction.
Being an isolated transaction, it will not be subject to VAT. The sale of the
vessel is merely incidental to main line of business.
What if the transaction was made after the effectivity of R.A. No
9337?
The transaction is still not subject to VAT, because it remains to be an
isolated transaction. NDC was only forced to sell its vessels by reason of
its privatization project. It was not a sale made through its own volition.
Mindanao II Geothermal v. CIR
G.R. No. 193301, 11 March 2013
Nissan Patrol Truck | Part of PPE
Mindanao Geothermal is engaged in the business of generation and
distribution of electricity. It was required to purchase vehicles, one of the
vehicles purchased is the Nissan Patrol Truck. Since Mindanao will not
use the truck, it decided to sell it. The truck has been used in the business
of Mindanao. It has been classified as part of its PPE as reflected in its
Financial Statement.
60 | KAMM Notes

Is the sale of the truck subject to VAT?
Since the truck has been used in the business of Mindanao. In fact, it has
been classified as part of its PPE as reflected in its Financial Statement,
then it shall be subject to VAT. Because the sale of a PPE of a corporation
is considered as incidental to the main line of business.
Sale of OA v. Sale of CA
Sale of OA is subject to VAT. Sale of CA is not subject to VAT.
Suppose:
A is paying for the construction of a building. However, the owner of the
land is B. B wants to transfer the title to A because the latter is the one
paying for it. Hence, they executed a deed of absolute sale.
BIR assessed 6% CGT because it claimed that the property is considered
as CA. Later, BIR changed its view claiming that the property is OA,
because it discovered that B is engaged in real estate business. Hence, it
assessed 6% CWT + 12% VAT.
Assuming that the property is considered as OA, shall it be subject
to VAT?
Yes, because it has been made in the ordinary course of business. If it is
CA, it shall not be subject to VAT.
PSALM v. Sem-Calaca
G.R. No. 204719, December 05, 2016
(Bar)
Power Plant | Forced Sale
EPIRA created PSALM, a GOCC which took over ownership of the
generation assets, liabilities, independent power producer contracts, real
estate and other disposable assets of the NPC
Because one of the power plants is not generating enough profits, they
decided to sell the same. PSALM sold the plant. BIR assessed PSALM for
VAT. PSALM argued that the transaction is not subject to VAT because it
was just a forced sale i.e. that the sale was mandated by the law.
Is the sale subject to VAT?
No. The sale made by PSALM is a mandated sale. Since PSALM was just
forced to sell the property, it will not be considered as a transaction made
in the ordinary course of business. Hence, it is beyond the scope of VAT
Note: The transaction is not exempt. The proper term to use is ‘the
transaction is beyond the scope of VAT’.
Classification of Real Property (RR 7-2003)
i. TP is engaged Real Estate
(1) Real Estate Dealer – One who is engaged in the buy and sell of RP.
All properties acquired are classified as RP-OA
(2) Real Estate Developer – One who buys and develops the RP, and
subsequently sells the RP
All RP acquired WON developed shall be RP-OA
Further, all RP primarily held for sale or for lease, shall be
considered as
RP-OA and all the properties used in business, shall be considered
as an
RP-OA
(3) Real Estate Lessor
All properties whether for land or improvement
a. Being leased or rent
b. offered for lease or rent or
c. being used in business
shall be considered as RP-OA
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
(4) TP habitually engaged in the TP business – TP registered with
HLURB or HUBCC
All acquired RP shall be classified as RP-OA
If the TP is not registered with the HLURB or HUBCC, but he has at
least 6 taxable RP transaction, regardless of amount, during the
preceding year (and not years) shall be deemed as engaged in Real
Estate business. Hence, all properties acquired in the course of
trade or business shall be considered as RP-OA.
ii. TP is not engaged in the Real Estate business
Under the RR, all RP (1) being used or (2) previously used in business
shall be considered as an RP-OA.
Depreciable asset
A depreciable asset does not lose its character as an RP-OA
Monetary consideration is not material (Quiz)
Monetary considerations, or absence or presence of profit, is not
significant in the characterization of the property, as long as the property
is used or has been used in business, whether for the benefit of the owner
or for the benefit of its members or SH, it shall be considered as RP-OA.
(Yung sa quiz na the president was using one of the properties of the
corporation as his residence)
Requirement| Certification from the Punong Barangay
If the RP is not being used in business, there is a requirement that a
certification coming from the Punong barangay must be submitted to the
BIR.
Suppose:
TP changed its business from a Real Estate business to a Non-Real Estate
business.
Will the classification of the RP change?
No, it will not change, it will remain as an RP-OA. Once an OA always an
OA.
“Parang boy scout lang” –Ma’am Tin
Imposition of VAT
On Sale of Goods or Properties
i. Tax Base: Gross Selling Price
Tax Base
Under the law, the 12% rate shall be based on Gross Receipts or Gross
Sales.
Under present RR, Gross Receipts and Gross Sales must be net of:
(1) Sales discounts
(2) Sales allowance
(3) Sales returns
Note: Cost of sales cannot be deducted
Medicard v. CIR
G.R. No. 222743, April 5, 2017
Members of Medicard pays annual fees to Medicard and in return, they
get health services from Medicard. CIR assessed Medicard, and according
to CIR, the taxable base is its gross receipts without deductions.
The payment of its members: 20% goes to compensation for the services
it rendered and 80% are for medical utilization and fees of doctors
Ruling
Under RR 16-2005, gross receipt is the total amount received for the
compensation of services render by an HMO.
Under RR 4-2007, amending RR 16-2005, gross receipt is the total
amount received for compensation service excluding the amount
earmarked for payment to third parties
61 | KAMM Notes

In this case, the 80% shall not be part of the gross receipts and only 20%
shall be considered as part of the gross receipts because that is composed
of the compensation it received for the services it rendered
Amount held in trust | Not Part of GSP
Taxable base shall only pertain the amount received as fees. The amount
held in trust shall not be considered as part of the gross receipts of the
HMO that is subject to VAT.
ii. Transactions Deemed Sale
Definition
These are transactions not really considered as sale made in the ordinary
course of business but the law considered them as a sale in the ordinary
course of business.
(a) Use of inventoriable properties which are originally intended
for sale for personal purposes
Suppose:
I have a grocery store and I displayed everything, because naubusan ako
ng shampoo, I got one from the store.
Is it for personal use?
Yes.
Is it a use of inventoriable good?
Yes.
Hence, it shall be considered as a TDS, because it was originally intended
for sale
(b) Distribution of an inventoriable property which is originally
intended for sale to SH as payment for dividends, or to
creditors in payment for obligations.
Note: It must always be originally intended for sale, meaning it should
form part of the TP’s inventoriable property.
(c) Consignment of Goods
Elements
Consignment of goods which are:
(1) not sold and
(2) not returned within 60 days from the date of consignment.
Concept of Consigned Goods
Only the possession is transferred to the consignee but not the
ownership.
“Consigned good ka ba?”
“Kasi nasa piling ka na nga ng iba, pero akin ka pa rin.”
-Ma’am Tin, 2019
Suppose:
I gave my Avon goods to JP, these are considered not sold, because the
transfer is under consignment, only the possession is transferred but not
the ownership.
However, the law considers these consigned goods as sold if they are not
sold and are not returned within 60 days.
Oplan Kandado Chismis (not really that important)
A VAT-registered grocery store in Baguio was closed by the BIR, because
may nag-“chuchu” that it was not issuing receipts. BIR conducted a
surveillance from 08:00 to 17:00, the BIR EE will presume all the sales
made by the store during the day by counting the goods sold.
Under the RR, the CIR has the authority to close a VAT registered
business, in case the VAT TP did not reflect the accurate amount of gross
sales or receipts.
Ma’am Tin asked for the receipts from its purchases from suppliers. The
receipts provides that “the goods shall be returned within a certain
number of days if the goods had not been sold or if the goods had not been
paid by the grocery owner”
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
The reason behind that provision in the receipt is that when the grocery
owners do not have the ability to pay the goods, the suppliers can get the
goods back anytime. Technically, it was already sold, but it is considered
as debts. They only put the provision under the receipt so that the
suppliers can easily get the goods back, because if it was already sold, they
can hardly get the goods back
Remed
Send a letter to the BIR claiming that the BIR cannot hold consigned
goods under detention because these are goods not belonging to the TP.
The TP is the one that is subject to the Oplan Kandado. Hence, the BIR
must open the store so that the suppliers whose goods are inside the
store can get their goods back
Risk
BIR might consider the period of consignment, because if the goods were
delivered 3 months ago, the goods are already considered transactions
deemed sale, because it was already beyond the 60-day period to return
the goods.
iii. Change or Cessation of Status as VAT-registered person
If a VAT registered entity closes its business, all of its inventoriable
property shall be considered as deemed sold. Hence, it is classified as
TDS.
In the above example, if the grocery owner plans to close its business, it
needs to determine the amount of its inventoriable property. Upon
assessment, it amounted to ₱300,000 to ₱500,000
The moment she closes, the amounts shall be considered as sold because
they shall be considered as TDS. Hence, it shall be subject to VAT.
Remedy: Exhaust all of the goods first before you close the business, or
play around the FS of the business i.e. reduce the amount.
CIR v. Magsaysay Lines
G.R. No. 146984, 28 July 2006
For the rules on TDS to be applicable, it must be first established that the
transaction is be subject to VAT. Here, the sale is an isolated transaction.
Being an isolated transaction, it is considered as a sale not made in the
ordinary course of business and hence, it outside the coverage of VAT.
Further, the CIR argued that the transaction is considered as a TDS
because there is a cessation of business of NDC after the privatization
project of the Government
Ruling
The rules on TDS shall not be applied, because at the outset, the
transaction is not subject to VAT. Meaning, you will only apply the rules
on TDS if it has been established that the transaction is subject to VAT.
So, if the transaction is beyond the scope of VAT system, because it does
not involve a sale made in the ordinary course of business, then you do
not apply the rules on TDS.
Note: Cancellation of VAT registration = Cessation of Business. Hence,
apply the TDS principles i.e., closed corporation, etc.
On Importation of Goods
Sales of Services of Goods (SOSG) and Use or
Lease of Properties
i. SOSG
(1) SOSG to International Air or Shipping Carriers
Tax Implication
ZR Transaction
Condition under the TRAIN Law
Provided that the SOSG has been actually used in its ordinary
course of trade or business (IASC)
(2) SOSG by IASC
Tax Implication
62 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

VAT Exempt CIR v. Placerdome Tech Services (Phils.)

G.R. No. 164365, 8 June 2007
ii. Use or Lease of Properties
This talks about the rehabilitation of a river located in the PH. The
See discussion services would be rendered by a DC, and the client is a NRFC. The
services were paid in US$. It was inwardly remitted.
Zero-Rated and Effectively Zero-Rated
How would you consider the transaction?
Transactions
It is a FCDT. Manifested by the following facts:
VAT Rates 1. It has a service i.e., rehabilitation of the river;
(1) Ordinary Rate - 12% 2. It was performed in the PH because the river is located in the PH;
(2) Zero Rated Transactions - 0% 3. It was paid for in an acceptable foreign currency i.e., US$;
(3) VAT exempt transactions - Exempt 4. It was rendered in favor of a NRC; and
5. It was in accordance with BSP RR i.e. there was inward
Remember: Memorize the list of Zero-Rated Transactions and VAT remittance.
Exempt Transactions.
“Inward Remittance” is a remittance that is wired, that the banking
Zero-Rated Transactions | TP must be a VAT registered entity system was used to pay for the professional fees
A transaction will never be considered as a Zero-Rated (ZR)Transaction
not unless the TP is a VAT-Registered TP. “Consumption of Service” contemplates the situs where the final
performance of obligation had been made in order to extinguish the
Three (3) Types of ZR Transactions: liability of the service provider
(1) Export Sales – one where the goods will be consumed outside the
PH Here, the service was consumed in the PH because the
rehabilitation was performed in the PH.
Cross-Border Doctrine
GR: If the TP is not a VAT registered entity, the transaction it made Is it subject to VAT then?
with respect to export sales will be considered as a VAT Exempt
transaction pursuant to the Cross-Border Doctrine Should have been, because the services were rendered in the PH.
XPN: If the law dictates that it is zero-rated e.g., transactions made
by registered BOI. Hence, the transaction is considered as ZR. Since the services are considered as FCDT with respect to
rehabilitation, it is subject to VAT at a 0% rate. FCDT are considered
Suppose: as an exception to the Destination Principle
If X Corp had exported goods worth ₱4,000,000 to USA. X Corp is
considered as a non-VAT Registered TP. The transaction is not a ZR What about escort service through hotels?
Transaction, because the TP is not-VAT registered, but a VAT
Exempt transaction pursuant to the Cross-Border Doctrine. It is still considered as FCDT because all the elements are present.

Entities registered with the BOI (Bar) Suppose:

Entity registered with the BOI shall be considered as engaged in A DC law firm was asked by FC, for a legal opinion. The law firm had
Export Sales. Hence, the transaction is considered as a ZR already issued the legal opinion and was paid $1,000 through
transaction inward remittance.

Kinds of Export Sales: Is the collection of the law firm subject to VAT?
1. Actual Shipment; and
2. Those classified under the law i.e. BOI registered products Yes, but it is subject to 0% VAT, because the transaction is classified
as a FCDT.
(2) Effectively ZR Transactions - one that deals with an entity exempt
from VAT and the agreement provides that the entity dealing with Note: Do not answer that it is “exempted from VAT” because the
it shall be subject to exempt as well transaction is still subject to VAT however, it is subject to a 0% rate.

Contains a provision that grants an exemption in favor of suppliers Is the firm (GPP) subject to Income Tax?
from the Indirect Tax
No, because the firm is merely a pass-through entity. Rather, the
Note: PH Acetelyne v. CIR &CIR v. Gotamco partners shall be the one subject to Income Tax.

(3) Foreign Currency Denominated Transactions (FCDT) Remember: Review RR 7-2003

Elements
a. There must be a service rendered VAT Exempt Transactions
• All types of services are covered - CIR v. AMEX
b. Services performed in the PH Sale of Agri-Food in their Original State
c. The service must be made in favor of NRC
d. The service must be paid for in an acceptable foreign (1) Agri-products sold in their Original State
currency; and The sale is VAT Exempt
e. That it must be in accordance with BSP rules and regulations
(2) Agri-products not sold in their Original State
Note: If all the 5 elements concur then you must classify the GR: The sale is not VAT Exempt
transaction as an FCDT. XPN: Cooperatives registered under the CDA
a. TP is Agri-Coop
Tsimis: If TP was established to produce agri-products, then the sale
Client is engaged in BPO business. They were not reflecting any of the product is considered as VAT Exempt, WON sold in
income because they claim that their clients are abroad their original state.
Under the TRAIN Law, agri-coops enjoy VAT Exemption with
Are they paid through Foreign Currency? respect to the sale of agri-products that they manufacture
b. TP is not Agri-Coop
Yes, even if their income is ₱10,000,000, it is still under the FCDT i. If sold to members – VAT Exempt
ii. Sold to non-members – VAT Taxable

63 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Remember: Processed agriculture food are not sold in their original

Simple Process of Preservation state. Hence, the transaction is subject to VAT.

Under Section 109(1)(A) of the TRAIN Law, products are still classified as Sale of Importation of
products in their original state even if they have undergone simple
processes of preservation or preparation for the market i.e. chopping,
Fertilizers/Seed/Seedlings
freezing, drying, salting, broiling, roasting, smoking, stripping, etc.
These are used to grow agri-food products. Hence, under such concept, it
Hence, tinapa, balut, boneless bangus, dried fish, etc. are exempt from shall be VAT Exempt
VAT, because they have only undergone a simple process of preservation.
Importation of personal and household effects
Restaurant Services (and not food alone) are subject to VAT belonging to the residents of the PH returning
If the TP registered itself as a restaurant business, there is service i.e., from abroad and nonresident citizens coming to
Chooks-to-go. Hence, it is subject to VAT
resettle in the PH
If the TP registers itself in retail business, there is no service, provided that
there are no dine-in services. Hence, it is VAT Exempt. Importation of professional instruments and
implements, wearing apparel, domestic animals,
Note: If there is already a sale of ‘service’ and not the product alone, these and personal household effects
transactions are no longer VAT Exempt.

Services subject to Percentage Tax

CIR v. United Cadiz Sugar Farmers Assoc. Multi-Purpose Coop.
G.R. No. 209776, 7 December 2016
(1) Services rendered by Gas and Water Utility
Subject to 2% other percentage tax (OPT). Hence, even if the utility
Cadiz is a duly registered cooperative under the Cooperative Code. BIR
earned ₱10,000,000 during the calendar year, it will not be subject
assessed Cadiz on the sale of its refined sugar. Cadiz claimed that it is the
to VAT, because under the law, the gross receipts of the entity shall
one who is the actual producers of such sugar
be subject to OPT.

The BIR, pursuant to an Administrative Issuance, required Cadiz to pay

(2) Common Carriers Tax
tax. BIR claimed that refined sugar is not a product in its original state,
because it did not undergo a simple process of preservation, etc.
GR: For land carriers, regardless of earnings, it will be subject to 3%
OPT.
Is Cadiz required to pay VAT?
XPN: For air carriers, it depends (discussed later, be patient):
a. International (3% OPT)
The sale is VAT exempt even though sugar is not a product in its original
b. Non-International (12% or 0% VAT)
state, because Cadiz is a duly registered a cooperative.

WON it sold the products to members or not, as long as it is the actual Services of Agri-Contract growers
producer, it is exempt from paying tax.
Agri-Contract Growers
Since Cadiz is not required to pay VAT for VAT Exempt transaction, it is Suppose:
not also subject to Advance VAT Payment. San Miguel Corporation (SMC) will contract X giving him ‘sisiws’ to take
care of. X owns the land and everything on it. When the ‘sisiws’ mature,
Note: In this case, the Court ruled that refined sugar is not a product in its SMC will check the ones that are saleable.
original state because it did not undergo simple process of preservation
or preparation Is he subject to VAT?

No. In this situation, X is an agri-contract grower for SMC. Therefore, the

PH Packing Corporation v. CIR
services of X is not subject to VAT.
26 December 1956

PH Packing is engaged in production of Pineapple Products: 80% are
canned and 20% are sold in their original state.
In 1948, PH Packing inquired with CIR on WON the sales of their canned
products are subject to % tax pursuant to CA 466.
CIR, pursuant to Sec 188 of NIRC, replied that the sale of canned
pineapples are not subject to % tax because all agri products WON in
their fresh state, as long as it is produced by the owner’s in his own land,
which is present in this case, shall not be subject to VAT.
Medical, dental, hospital and veterinary services
except those rendered by professionals.
Medical Machines or Services
The fees on the usage of medical machines or services i.e., ultrasound,
shall not be subject to VAT.
Professional Services
However, the reading fee shall be subject to VAT, because this service is
already rendered by a professional i.e., the doctor.

However, in 1954, CIR assessed PH Packing for deficiency tax on the sale
Educational Services rendered by Private
of the canned pineapples. PH Packing questioned the assessment of CIR
Educational Institution duly accredited by
Ruling DepEd, CHED, and TESDA and those rendered by
Under CA 466, agricultural products i.e. pineapples, are exempt from % governmental educational institution.
tax WON the products are in their original state. Canning the pineapples
did not strip-off its status as an original state
Suppose:
X Corp (a Korean school) is engaged in teaching the English language.
Motion for Reconsideration
Is it considered as an Educational Institution?
In the passage of RA 1612, amending CA 466, the legislature already
relinquished the exemption on processed agri-products. Hence, under
Under the YMCA case, it will be considered an educational institution if
RA 1612, the canned pineapples are no longer exempt from % taxation
such institution is hierarchically structured i.e., Grade 1, Grade 2, etc.

However, the Court still affirms the assessment because RA 1612 does
In this case, X Corp has Level 1, Level 2, & Level 3 assessment levels,
not apply retroactively.
including exams. Hence, it has a hierarchically structured learning
system. However, to be VAT Exempt, it must prove the fact that its income
had not been used other than for educational purposes.

64 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

NSNP Educational Institutions Export sales by persons who are not VAT-
Section 4(3) Art XIV1987 Constitution – “All revenues and assets of non-
stock, non-profit educational institutions used actually, directly, and registered
exclusively for educational purposes shall be exempt from taxes and
duties. Upon the dissolution or cessation of the corporate existence of To prevent the violation of the principle of Cross Border Doctrine
such institutions, their assets shall be disposed of in the manner
provided by law
Sale of RP-CA & Sale of Residential Lot and
Proprietary educational institutions, including those cooperatively Residential House and Lot
owned, may likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends and
Sale of RP-CA
provisions for reinvestment.”
Sale of RP-CA is not a sale in the ordinary course of business.
Section 30(H) of the Tax Code – “Sec. 30. Exemptions from Tax on
Corporations. - The following organizations shall not be taxed under Thus, it is VAT exempt but the sale is still subject to 6% CGT based on its
this Title in respect to income received by them as such: GSP or FMV, whichever is higher

(H) A nonstock and nonprofit educational institution; Sale of Residential Lot & Residential House and Lot

Notwithstanding the provisions in the preceding paragraphs, the

Threshold amounts
income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their Sale of Residential Lot – ₱1,500,000
activities conducted for profit regardless of the disposition made of Sale of Residential House and Lot – ₱2,500,000
such income, shall be subject to tax imposed under this Code.”
Note: Logic dictates that these are RP-OA
Section 109 of the TRAIN Law – “Sec. 109. Exempt Transactions. (1)
Subject to the provisions of Subsection (2) hereof, the following
Subject to VAT if the amount exceeds the threshold amounts
transactions shall be exempt from the value-added tax:
Hence, a sale of a residential lot will only be subject to VAT if it exceeds
(H) Educational services rendered by private educational institutions,
duly accredited by DepEd, CHED, TESDA and those rendered by ₱1.5 million and a sale of residential house and lot will only be subject to
government educational institutions” VAT if it exceeds ₱2.5 million.

Income Tax Implication
Income derived from Tuition Fee:
(1) Used for Educational Purpose – Exempt under the Constitution
(2) Used for Proprietary Purpose – Exempt under Sec 30 of Tax Code
Income derived from Leasing:
(1) Used for Educational Purpose – Exempt under the Constitution
(2) Used for Proprietary Purpose –Taxable under Income Tax
Note: Prior to the TRAIN Law, the amounts are higher
Sale of Residential Units
Commercial units not applied
The rule only applies if the subject property is a residential unit. It does
not apply if the leased unit is a commercial property

Note (Quiz): Miscellaneous fees are still part of the Tuition fees and shall Threshold amount
not be considered as income derived from proprietary purpose. The fee must not exceed ₱15,000

VAT Implication Hence, it will be subject to VAT if:

Income derived from Tuition Fee (1) The monthly rental per unit exceeds ₱15,000; and
(1) Used for Educational Purpose – Exempt under the Constitution (2) The annual aggregate/gross receipts must exceed ₱3,000,000.
(2) Used for Proprietary Purpose – Exempt under Sec 109 of the Tax Note: Both elements must concur.
Code
Income derived from Leasing: Suppose:
(1) Used for Educational Purpose – Exempt under the Constitution Monthly Fee Gross Receipts VAT Implication
(2) Used for Proprietary Purpose –Taxable under VAT ₱15,000 ₱3,000,000 Not VATable
₱15,000 ₱3,500,000 Not VATable
Services rendered by individuals pursuant to an ₱16,000 ₱3,000,000 Not VATable
EE-ER Relationship ₱16,000 ₱3,500,000 VATable

Because it is not a SBLE or importation of goods and services under the “Per Unit” Definition
ordinary course of business Under RR 16-2011, per unit has been defined as:
• Apartment – per apartment
Services rendered by regional or area HQs • Room – per room
• Bed spacing – per student
established in the PH by multinational
corporations
Suppose:
X owns four (4 )leasing units. They have a VAT Assessment problem.
Transactions which are exempt under They are earning more than the VAT Threshold amount.
international agreements to which the PH is a (1) Charge per room: ₱10,000
signatory or under special laws (2) Charge per student (if more than three students per room): ₱5,000

Are they subject to VAT under the following conditions?

Sales by agri-coops duly registered with the
Cooperative Development Authority (CDA) No, X is VAT Exempt.

As discussed above
Gross receipts from lending activities by credit
or multi-purpose coops duly registered with the
CDA
Note: It must relate to Gross Receipt related to lease services
However, if the lease under the receipt was indicated to be on a “per
room” basis i.e., under the receipt the amount is ₱20,000 per room, X will
be subject to VAT.
What is the remedy?
Issue an individual receipt per student on a bed space setting and not on
a per room setting.

Sales by non-agricultural, non-electric and non-

credit coops duly registered with the CDA
65 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Sale, importation, printing or publication of • MNL to Singapore – VAT Exempt; 3% OPT

PAL (DC)
books and any newspaper, magazine review or
• MNL to Boracay – 12% VAT
bulletin which appears at regular intervals with • MNL to Singapore – ZR 0% VAT
fixed prices for subscription and sale and which
is not devoted principally to the publication of Income Tax Implication
paid advertisements Tiger Airways (IC)
• MNL to Boracay – 2.5% GPBT
• MNL to Singapore – 2.5% GPBT
Transport of passengers by international
PAL (DC)
carriers • MNL to Boracay – Normal Tax
• MNL to Singapore – Normal Tax
Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine, Note: GPBT applies if there are goods, excess cargoes, etc. that had
originated from the PH, etc. It shall be imposed on International Air
equipment and spare parts thereof for domestic
Carriers
or international transport operations
ii. Sales of Services of Goods (SOSG) and Use or Lease of
Importation of fuel, goods and supplies by properties
persons engaged in international shipping or air
See discussion
transport operations

Sections 109 (S)(T)(U) Services of bank, non-bank financial

(in relation to Section 108(B)(4&6) and Section 106(1 to 6) intermediaries performing quasi-banking
functions, and other non-bank financial
“SEC. 106. Value-Added Tax on Sale of Goods or Properties-(2) The following sales by
VAT-registered persons shall be subject to zero percent (0%) rate:
intermediaries.
Export Sales.—The term ‘export sales’ means:
(1) The sale and actual shipment of goods from the PH to a foreign country, Tax Implication
irrespective of any shipping arrangement that may be agreed upon which may Tax Exempt because it is subject to Gross Receipt Tax which is in the
influence or determine the transfer of ownership of the goods so exported and nature of an OPT
paid for in acceptable foreign currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP); Sale or lease of goods and services to senior
(2) Sale and delivery of goods to: citizens and persons with disability
i. Registered enterprises within a separate customs territory as provided
under special laws; and
ii. Registered enterprises within tourism enterprise zones as declared by the Transfer of property pursuant to Section
Tourism Infrastructure and Enterprise Zone Authority (TIEZA) subject to 40(C)(2) of the NIRC
the provisions under Republic Act No. 9593 or The Tourism Act of 2009
(3) Sale of raw materials or packaging materials to a nonresident buyer for delivery
Section 40(C)(2) | Tax Free Exchange
to a resident local export-oriented enterprise to be used in manufacturing,
processing, packing or repacking in the PHof the said buyer’s goods and paid for These are transactions involving the exchange of a property or properties
in acceptable foreign currency and accounted for in accordance with the rules for shares of stocks in order to gain control of the corporation.
and regulations of the Bangko Sentral ng Pilipinas (BSP)
(4) Sale of raw materials or packaging materials to export-oriented enterprise Tax Implication
whose export sales exceed seventy percent (70%) of total annual production Exempt from both Income Tax and VAT
(5) Those considered export sales under Executive Order No. 226, otherwise known
as the Omnibus Investment Code of 1987, and other special laws; and
(6) The sale of goods, supplies, equipment and fuel to persons engaged in Association dues, membership fees, and other
international shipping or international air transport operations: Provided, That assessments and charges collected by
the goods, supplies, equipment and fuel shall be used for international shipping
or air transport operations.”
homeowners’ associations and condominium
corporations
“Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(B) Transactions Subject to Zero Percent (0%) Rate. The following services Note: Yamane v. Lepanto case
performed in the PHby VAT registered persons shall be subject to zero percent (0%)
rate:
(4) Services rendered to persons engaged in international shipping or Sale of gold to the Bangko Sentral ng Pilipinas
international air transport operations, including leases of property for use (BSP)
thereof: Provided, That these services shall be exclusive for international
shipping or air transport operations;
Tax Implication
(6) Transport of passengers and cargo by domestic air or sea vessels from the
PHto a foreign country” Prior to the TRAIN LAW – considered as ZR Transaction
Under the TRAIN Law – it is now a VAT Exempt Transaction.
i. Transport of Passengers
Sale of drugs and medicines prescribed for
(1) Performed by International Air Carrier diabetes, high cholesterol, and hypertension
If performed by an International Carrier it is VAT Exempt. Hence,
beginning January 1, 2019
there is no qualification

Note: The VAT Exempt is only with respect to sales beginning January 1,
Reason for VAT exemption
2019
Transport of cargos or passengers by an International Carrier is
subject 3% OPT regardless of the amount of gross receipts/sales
Sale or lease of goods or properties or the
(2) Performed by Domestic Air Carrier performance of services other than the
It is not VAT Exempt, however transactions mentioned in the preceding
a. Point of Destination is outside the PH – ZR (Section
paragraphs
108(B)(6))
b. Point of Destination is within the PH – 12% VATable
Provided that the gross annual sales and/or receipts do not exceed the
amount of ₱3,000,000
Business Tax Implication
Tiger Airways (IC)
• MNL to Boracay – VAT Exempt; 3% OPT
66 | KAMM Notes

Note: If the gross receipts or sales exceeds the threshold amount of
₱3,000,000, then it is subject to VAT; otherwise, it is VAT Exempt but it is
still subject to OPT.
Input and Output Tax
Output VAT – the VAT imposed on the sale of products
Input VAT– the VAT acquired through the purchase of products
Purchase Price vis-à-vis Input Vat
The VAT will be considered as part of the purchase price, and not Input
VAT if the buyer is:
(1) Not a VAT registered entity; and
(2) Not engaged in the line of business
Suppose:
Kurdel engaged in the business of buying and selling bags. Kurdel is a VAT
registered entity. King is also engaged in the business of buying and
selling bags, hence, he is also a VAT registered entity. King’s main supplier
is Kurdel. Francis is the consumer of bags.
Kurdel will sell the bag to King for ₱100 000, exclusive of VAT. Since
Kurdel is a VAT-registered TP, he has the option to shift the burden of
VAT to King. The VAT is ₱12,000. Hence, King will pay ₱112,000
On the part of Kurdel, the ₱12 000 is Output VAT
On the part of King, the ₱12 000 is Input VAT.
King has a regular customer, Francis. Francis bought the same bag from
King. King sold it to Francis for ₱200,000, exclusive of VAT. Since King is
a VAT-registered TP, Francis will pay ₱224,000.
On the part of King, the 24 000 is Output VAT
On the part of Francis, since he is a consumer and not a VAT registered
entity, the ₱24 000 is part of the purchase price. You would only consider
it as an Input VAT if Francis is a VAT registered entity and if he is engaged
in such business.
Tax Credit Mechanisms
Definitions
• ‘Tax Credit Mechanism’ is one
(1) where the Input VAT can be used to reduce the amount of
Output VAT; or
(2) where the Creditable Input VAT can be used to reduce the
amount of Output VAT for the next succeeding quarters or
taxable years
• ‘Creditable Input VAT’ is when the Output VAT is less than the Input
VAT
• ‘VAT Payable’ is when the Output VAT is greater than the Input VAT.
Suppose:
Amare La Cucina, in its younger years, hasn’t been earning millions,
hence, it was still then subject to 3% Percentage Tax based on its Gross
Sales. Note that VAT is also based on Gross Sales.
However, when the restaurant was already earning millions, it is already
subject to VAT. Under the law, if the TP has already reached the threshold
amount, it shall be mandated to register in the VAT system.
Will its tax due increased from adopting the VAT system?
Not necessarily. Amare might even pay less tax in adopting the VAT
System.
Amare’s supplier of goods is a VAT registered entity. Hence, Amare is
paying Input VAT. For the past few years, it never used the Input VAT
because he is under the Percentage System.
First, adopting the VAT System, it can shift the burden of paying VAT to
the end consumer. Hence, it will not pay any VAT.
Second, the Input VAT it has been paying to the supplier can be used to
reduce the Output VAT. Hence, if there are more purchases than sale,
there is a possibility that it will not pay any VAT.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Tax Credit Certificate
Chismis of Texas Instrument
TI is engaged in a Zero-Rated activity, because it is engaged in exportation
business, where at least 75% of its products are being exported. Hence, it
has no Output VAT.
However, TI has purchases as well, hence, it is then subject to Input VAT
and VAT can also be transferred to TI. (Note: Under the present law, TI
will also be exempt from Input VAT as long as TI can present a
certification that it is likewise exempt from Input VAT arising from its
purchases. However, during this time, this rule is not yet applicable.)
Moving on, TI still has Input VAT for its purchases. For several years, the
Input VAT can accumulate to millions. Hence, it has creditable input VAT,
but TI cannot use such because it remains to be Zero-Rated.
If you are the accountant of TI, you will need to ask for the issuance of a
TCC from the Government. TCC can be used to credit it on other kinds of
tax i.e., Income Tax, or you can sell it to other entities for them to use the
TCC as tax credit on their own.
TCC lifetime
TCC can only be used for a period of five (5) years. Hence, TCC can be sold
to other entities
Note: Pilipinas Shell Case
Cancellation of the Government of all TCCs
This is already considered as confiscatory, because this is no longer
considered as a mere privilege. A TCC is already considered a proprietary
right once the government stamped the certification in issuing a TCC
pursuant to a tax credit mechanism.
Transitional Input Tax
Definition
Transitional input tax (TIT) is a type of input tax which is (1) equivalent
to 2% of the value of beginning inventory, or (2) the actual input tax paid,
whichever is higher.
Coverage
TIT is available when:
(1) The TP is a newly VAT registered entity, by reason of voluntary
registration; or
(2) A newly registered VAT TP, by reason of the mandate of
registration i.e., when his gross sales or receipts exceed ₱3,000,000.
Note: The TP must be newly registered VAT TP
Suppose:
The owner, Edmar, wants to change Amare from sole proprietorship to a
corporation and to register as a VAT entity because his gross receipts
already exceeded the threshold amount.
Can he use the paid input VAT prior to registration?
When he is still under the OPT system, he cannot use the input tax it paid
because tax credit mechanisms only apply on the VAT system
When he is already under the VAT system, can he file a refund?
No, because the TPs are different i.e., the sole proprietorship is different
from the corporation. You can only use the TIT if the TP are the same.
What if the TP is the same i.e. TP is still a sole prop, can Edward
utilize the amount of input tax that he had paid prior to his
registration under the VAT system?
Yes, this is the so-called transitional input VAT (TIV). However, under the
law, in order for a TP to avail of the TIV. There are requirements.
Requirements
(1) Submission of a report of his or its beginning inventory in
accordance prescribed rules by the SOF; and
(2) It must be submitted to the BIR
Note: Non-submission, the TP cannot avail of TIV
67 | KAMM Notes

‘Beginning Inventory’ the ending inventory of Amare prior or on the day
of the registration
Suppose:
Amare’s gross receipts or beginning inventory prior to the registration
under the VAT system amounted to ₱5,000,000, 2% of which is
₱100,000. Amare’s actual VAT paid amounted to ₱200,000. Amare shall
use the latter as utilized IV, because the higher amount shall be
considered.
What if Amare did not keep the receipts, what will be the basis?
₱100,000 shall prevail, because the ₱200,000 must be supported by
receipts.
Fort Bonifacio Development Corp v. CIR
G.R. No. 158885 & 170680, 2 April 2009
BGC was a military camp back then when it was subsequently sold to the
Government. The land was sold to Fort Bonifacio Dev’t Corp. (FB) for
₱10,000,000, during the time when VAT was not yet implemented. FB
was engaged in the real estate business. Hence, no VAT was paid by FB.
FB developed the land, subsequently, it sold the lands to different
corporations.
When FB sold the land, the VAT system was already implemented. Hence,
the sale was subjected to 12% VAT.
Can he utilize IV, if any?
No, because there was no VAT system before i.e. FB did not pay any IV to
the Government when it purchased the land.
However, FB as a newly registered TP, it deducted 2% based on the value
of the land.
Is the land considered as beginning inventory?
Yes, because that is the business of FB and at the start of the year when
the VAT system took effect, it was not yet sold by FB.
CIR questioned the deduction of 2%, because it claimed that there was no
actual payment of input tax when it purchased the land from the
Government. In sum, CIR contends that the payment of input tax is a
condition sine qua non for the availment of TIT
Ruling
The actual payment of TIT is not considered a precondition to the
availment of TIV. In fact, the amount of the actual input tax is only made
as a parameter in order to determine the amount of TIT that can be paid
by the TP.
Hence, even if there is no actual TIT paid, as long as that there is beginning
inventory, the TP can still avail of TIT
In the case of Amare/Edmar, the ₱100,000 shall prevail because in order
to utilize the 2% deduction, the gross sales or gross receipts must be
supported by official receipts.
Necessity of a Report on Beginning Inventory
Suppose:
The TP has official receipts on the amounts it paid prior to the registration
under the VAT system. However, he was not able to submit a report
before the BIR.
Will the TP be allowed to deduct TIT?
No. Because the provision of the law states that the TIT availment shall
be subject to the requirement that the TP shall submit a report on his
beginning inventory prior to the registration under the VAT system.
Otherwise, he cannot avail of the TIV. Non-existence of the beginning
inventory will also raise a doubt as to the validity for the claim of the IV.
TIV can never be refunded | Being merely a privilege
Even if it is attributed to ZR transaction, because the grant of TIV is merely
a privilege granted to newly registered VAT TP.
They had been a part prior to the registration under the VAT system, in
which case, the tax credit mechanism had been utilized in order to arrive
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
at the amount of creditable input tax. Hence, it cannot be a subject for
refund.
Presumptive Input Tax
Tax Rate
4% based on the gross value of purchases
Coverage | S2M2O
Only applies on cases of processing or manufacturing of Sardines,
(refined) Sugar, Mackerel, Milk, and (cooking) Oil.
Note: The common denominator is that they are all “processed” and that
the main ingredient used is an agri-food product.
Processed or Packed Noodle
No. The list is exclusive. In some tax books, they have included packed
noodles in the list, however, a perusal of the provision of the law would
imply that packed noodles shall be excluded.
Reason for the implementation of presumptive input VAT (PIV)
Suppose, Ma’am Tin will buy fish from farmers to manufacture it as a
canned good. The farmer will not pass on VAT upon purchase, because
the sale of agri-food in its original state is exempt from VAT. When the
fish is already processed i.e. canned good,it shall be subject to VAT. There
is a “konting lugi” or slight loss on Ma’am Tin’s part. That is why the law
included the concept of PIV.
Hence, in this case, Ma’am Tin can already declare input tax equivalent to
4% of the gross value of the purchases needed to produce the canned
goods i.e., sardines or mackerel.
Refund or Tax Credit of Excess Input Tax;
Procedure
General Principles
GR:
(1) Section 112 - Claim for refund of unutilized IV. Provided, the
unutilized IV must be attributable to ZR or EZR transactions.
(2) Section 229 – Refund of (OIEP) overpaid VAT, illegal payment,
erroneous payment or payment of penalty not authorized under
the law. Here, the applicant must be the statutory TP.
XPN: CIR v. PASAR, when the purchaser can establish his exemption from
both direct and indirect tax. As such, the TP can file a claim for refund.
Contex v. CIR
G.R. No. 151135, 02 July 2004
Who may claim for refund?
Contex is a locator. A locator is an entity registered within an eco-zone.
Under RA 7227, locators are exempt from both direct and indirect taxes.
However, Contex is not a VAT Registered entity. The suppliers shifted the
tax to Contex. Contex realized that it should not have been subject to tax
and thus, it filed a claim for refund for the VAT it paid to its suppliers
Can he file a claim under Section 112?
No. Because he is not a VAT registered entity, being non-VAT registered,
it cannot avail of the tax credit mechanisms, and hence, it cannot acquire
IV. Therefore, the IV that had been shifted by the suppliers to Contex will
just form part of the purchase price.
Can he file a claim under Section 229?
No. Because Contex is not the statutory TP, only the burden of tax is
shifted, and not the tax liability.
CIR v. Seagate Technology (Phils.)
G.R. No. 153866, 11 February 2005
Same facts as Contex, such that Seagate is the locator. However, the
difference with Contex is that Seagate is VAT registered entity.
An eco-zone is created by legal fiction as entity located in a foreign
territory. Hence, all the sales made by the suppliers to Seagate is
considered as export sales. Being an export sale, it should have been
subject to ZR transaction.
68 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Invoicing
What about the sales made by Seagate? Invoicing requirements only No need to comply with the
Requirements applies to refund on invoicing requirements
Import sales are subject to 12% tax. However, under RA 7227, a locator Section 112
is both exempt from direct and indirect.
(Bar) Suppose:
The situation calls for a VAT Exempt Party, hence, the sales transaction TP filed a refund of VAT because it closed its business. Manufacturing
can be subject to VAT, but at a zero rate. business does not fall on FCDT nor Export Sales nor sale to VAT Exempt
entities. Hence, it is not subject to ZR, rather, 12% VAT.
VAT Exempt Party, can avail of refund of unutilized IV.
VAT Exempt Transaction, cannot utilize IV. Shall the refund fall under Section 112?

ZR vis-à-vis VAT Exempt No, because the TP did not refund an unutilized input tax that is
The difference is the Input VAT attributable to ZR or EZR transaction. Hence, it shall fall under Section
• ZR – Input VAT is allowed 229.
• VAT Exempt – Input VAT is not allowed
However, CIR denied the refund because there is failure in complying
CIR v. Seagate Technology with the invoicing requirements i.e. lack of the words ‘Zero Rated’.
G.R. No. 153866, 11 February 2005
VAT Exempt Entity v. VAT Exempt Transaction Is the CIR correct?

An exempt transaction, involves goods or services which are specifically No, because invoicing requirements only applies to refunds under
listed in and expressly exempted from the VAT under the Tax Code, Section 112. The current issue calls for the application of a refund under
without regard to the tax status – VAT exempt or not - of the party to the Section 229. Therefore, failure to include “Zero Rated” is immaterial and
transaction. as such the claim for refund shall not be denied.

The seller is not allowed any tax refund of or credit for any input taxes Sitel PH Corporation v. CIR
paid. Hence, no input VAT is allowed G.R. No. 201326, 8 February 2017

An exempt party, on the other hand, is a person or entity granted VAT Sitel filed separate claims for refund or issuance of tax credit with the
exemption under the Tax Code, a special law or an international One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the
agreement to which the PH is a signatory, and by virtue of which its DOF for its unutilized input VAT arising from domestic purchases of
taxable transactions, it becomes exempt from VAT. goods and services attributed to zero-rated transactions and purchases
or importations of capital goods.
Such party is allowed to file a tax refund of or credit for input taxes paid,
as long as the TP is a VAT Registered TP. Hence, input VAT is allowed The CTA Division denied found that Sitel failed to prove that the
because only VAT-Registered TP can avail of Tax Credit Mechanisms recipients of its services are doing business outside the PH, as required
under Section 108(B)(2), NIRC.
Section 112 vis-à-vis Section 229
Ruling:
The unutilized IV must be attributable to ZR or EZR transactions
If you purchase supplies, you must sell it in a ZR or EZR transactions Sitel's Judicial Claim/or VAT Refund
was deemed timely filed
Suppose:
Ma’am Tin has 2 clients, a resident client and a non-resident client. Both Under Section 112, the CIR is given 120-days within which to grant or
pays in foreign currency. The transaction with the former is subject to deny a claim for refund. Upon receipt of CIR' s decision or ruling denying
12% VAT, and the transaction with the latter is subject to FCDT. the said claim, or upon the expiration of the 120-day period without
action from the CIR, the TP has thirty (30) days within which to file a
If Ma’am Tin rendered services to both of them, can the VAT on the petition for review with the CTA.
purchase of supplies she bought for both clients be subject for a
claim for refund under Section 112, NIRC? However, in San Roque, the Court clarified that the 120-day period does
not apply to claims for refund that were prematurely filed during the
For the resident client: No, because the input VAT is not attributable to a period from the issuance of BIR Ruling No. DA-489-03.
ZR or EZR transaction.
In this case, records show that Sitel filed its administrative and judicial
For the non-resident client: Yes, because the input VAT is already claim for refund on March 28, 2006 and March 30, 2006, respectively, or
attributable to a ZR or Effective ZR transaction. Because in this case, a after the issuance of BIR Ruling No. DA-489-03, but before the date when
FCDT is considered as a ZR transaction. Aichi was promulgated. Thus, even though Sitel filed its judicial claim
prematurely, i.e., without waiting for the expiration of the 120-day
Note: Skip both Acesite and PAGCORcases because these are “easy” mandatory period, the CTA may still take cognizance of the case because
cases. the claim was filed within the excepted period stated in San Roque. In
other words, Sitel' s judicial claim was deemed timely filed and should
Section 112 v. Section 229 have not been dismissed by the CTA En Banc
Section 112 Section 229
Refund of (OIEP) overpaid Sitel failed to prove
Pertains to refund VAT, illegal payment, that the recipients of its call services
of Unutilized IV. It erroneous payment or are foreign corporations
As to the claim doing business outside the PH
must be payment of penalties not
for refund
attributable to ZR or authorized under the law.
EZR transactions Hence, the applicant must Sitel's claim for refund is anchored on Section 112(A) of the NIRC, which
be the statutory TP. allows the refund or credit of input VAT attributable to zero-rated or
It is not necessarily that the effectively zero-rated sales.
As to the status It must be VAT TP is VAT registered.
of the TP registered However, the TP must be The Court clarified that an essential condition to qualify for zero-rating
the statutory TP. under the aforequoted provision is that the service-recipient must be
The IV must be doing business outside the Philippines
As to ZR attributable to ZR Not necessarily attributable
Transactions and EZR to ZR and EZR The Court emphasized that a TP claiming for a VAT refund or credit
transactions under Section 108(B) has the burden to prove not only that the recipient

69 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

of the service is a FC, but also that said corporation is doing business Inasmuch as its liability for the payment of the excise taxes accrued
outside the PH immediately upon importation, Chevron was bound to pay, and actually
paid such taxes. But the status of the petroleum products as exempt from
In this case, Sitel fell short of proving that the recipients of its call services the excise taxes would be confirmed only upon their sale to CDC in 2007.
were FC doing business outside the PH. As correctly pointed out by the Before then, Chevron did not have any legal basis to claim the tax refund
CTA Division, while Sitel' s documentary evidence, which includes or the tax credit as to the petroleum products.
Certifications issued by the SEC and Agreements between Sitel and its
foreign clients, may have established that Sitel rendered services to Consequently, the payment of the excise taxes by Chevron upon its
foreign corporations in 2004 and received payments therefor through importation of petroleum products was deemed illegal and erroneous
inward remittances, said documents failed to specifically prove that such upon the sale of the petroleum products to CDC.
foreign clients were doing business outside the PH or have a continuity
of commercial dealings outside the PH CIR v. Pasar
G.R. No. 186223, 01 October 2014
Sitel failed to strictly comply
with invoicing requirements for VAT refund PASAR is registered Zone Export Enterprise with the Export Processing
Zone Authority (EPZA). PASAR uses petroleum products for its
The Court ruled that in a claim for tax refund or tax credit, the applicant manufacturing and other processes, and purchases it from local
must prove not only entitlement to the grant of the claim under distributors, which import the same and pay the corresponding excise
substantive law, he must also show satisfaction of all the documentary taxes. The excise taxes paid are then passed on by the local distributors
and evidentiary requirements for an administrative claim for a refund or to its purchasers. In this particular case, Petron passed on to PASAR the
tax credit and compliance with the invoicing and accounting excise taxes it paid on the petroleum products bought by the latter
requirements mandated by the NIRC. The NIRC requires that the
creditable input VAT should be evidenced by a VAT invoice or official PASAR filed a claim for refund and/or tax credit.
receipt.
Is PASAR the proper party to claim the tax credit/refund on the
In the same vein, considering that the subject invoice/official receipts are excise taxes paid on the petroleum products purchased from
not imprinted with the taxpayer's TIN followed by the word VAT, these Petron.
would not be considered as VAT invoices/official receipts and would not
give rise to any creditable input VAT in favor of Sitel. Yes. PASAR is the proper party to file a claim for the refund/credit of
excise taxes
Chevron PH, Inc. v. CIR
G.R. No. 210836, 01 September 2015 The petitioner insists that PASAR is not the proper party to seek a refund
of an indirect tax, such as an excise tax or Value Added Tax, because it is
Doctrine: Excise tax on petroleum products is essentially a tax on not the statutory taxpayer. The petitioner's argument, however, has no
property, the direct liability for which pertains to the statutory TP (i.e., merit.
manufacturer, producer or importer). Any excise tax paid by the
statutory TP on petroleum products sold to any of the entities or agencies The rule that it is the statutory TP which has the legal personality to file a
named in Section 135 of the NIRC exempt from excise tax is deemed claim for refund finds no applicability in this case. In Philippine Airlines,
illegal or erroneous, and should be credited or refunded to the payor Inc. v. CIR, the Court distinguished between the kinds of exemption
pursuant to Section 204 of the NIRC. This is because the exemption enjoyed by a claimant in order to determine the propriety of a tax refund
granted under Section 135 of the NIRC must be construed in favor of the claim. "If the law confers an exemption from both direct or indirect taxes,
property itself, that is, the petroleum products. a claimant is entitled to a tax refund even if it only bears the economic
burden of the applicable tax. On the other hand, if the exemption
Chevron sold and delivered petroleum products to CDC. Chevron did not conferred only applies to direct taxes, then the statutory taxpayer is
pass on to CDC the excise taxes paid on the importation of the petroleum regarded as the proper party to file the refund claim."
products sold to CDC. Hence, it filed an administrative claim for tax refund
or issuance of tax credit certificate In PASAR's case, Section 17 of P.D. No. 66, as affirmed in Commissioner of
Customs, specifically declared that supplies, including petroleum
Is Chevron entitled to the tax refund or the tax credit for the excise products, whether used directly or indirectly, shall not be subject to
taxes paid on the importation of petroleum products that it had sold internal revenue laws and regulations. Such exemption includes the
to CDC? payment of excise taxes, which was passed on to PASAR by Petron.
PASAR, therefore, is the proper party to file a claim for refund
Yes, the excise taxes that Chevron paid on its importation of petroleum
products subsequently sold to CDC were illegal and erroneous, and Procedure
should be credited or refunded to Chevron in accordance with Section
204 of the NIRC.
Written Claim
for Refund Section 112 Section 229
With respect to imported things, Section 131 of the NIRC declares that
before the CIR
excise taxes on imported things shall be paid by the owner or importer.
OIEP: Overpayment,
For this purpose, the statutory taxpayer is the importer of the things
Illegal Payment,
subject to excise tax
Type of tax Deals with unutilized Erroneous Payment, or
payment input VAT Payment not
Chevron, being the statutory TP, paid the excise taxes on its importation
Authorized Under the
of the petroleum products
law
TP must be VAT
Pursuant to Section 135(c), petroleum products sold to entities that are
Registered (because
by law exempt from direct and indirect taxes are exempt from excise tax.
Entity/TP only a VAT Registered Any TP
Section 135(c) should thus be construed as an exemption in favor of the
TP can avail of the
petroleum products on which the excise tax was levied in the first place.
unutilized input VAT)
The exemption cannot be granted to the buyers – that is, the entities that
Input VAT must be
are by law exempt from direct and indirect taxes –because they are not Type of Not necessarily
attributable to a
under any legal duty to pay the excise tax. Transaction engaged in ZR/EZR
ZR/EZR transaction
Must comply with the Does not need to
CDC was created to be the implementing and operating arm of the Bases Invoicing
Invoicing comply with the
Conversion and Development Authority to manage the Clark Special Requirements
Requirements Invoicing Requirement
Economic Zone (CSEZ) As a duly-registered enterprise in the CSEZ, CDC
has been exempt from paying direct and indirect taxes pursuant to Two (2) years from the
Two (2) years from
Section 2421 of Republic Act No. 7916 and RA 9400. Prescriptive date where the
the close of taxable
Periods purchases were made
quarter where the
or date of payment,

70 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

sales were made regardless of any However, if the corporation TP adopts fiscal year, it must be filed of
(Mirant Doctrine) supervening event the 15th day of the 4th month following the close of the year (still
April 15)
Note:
‘Date of payment’ pertains to the date when the tax has been finally Quarter returns are Provisional in nature
determined (Jurisprudence) Quarter filing of returns are provisional in nature, because the amounts
‘Tax finally determined’ is upon filing of final adjustment return in cases therein indicated are subject to adjustments upon filing of the annual
of income tax income tax return.

Filing of Returns and Payment Determination of Liability | Annual

Tax liability are determined upon filing of the annual income tax return
i. VAT Return
Suppose:
When to file | Form (20-25) TP acquired purchases from Jan 2018 to December 2018. TP acquired
• Every Quarter input VAT from January to December, the TP is engaged in export sales.
• The TP must file monthly returns for the first 2 months of each
taxable quarter. If the TP will file for a refund of unutilized IV, will he file under 112
or 229?
Monthly | Form 2550M
It must be filed 20 days after the close of the taxable month Section 112, because the type of the transaction is attributable to ZR.

Quarterly | Form 2550Q
Within 25 days after the close of the taxable quarter. The quarterly
return will cover all the sales or transactions made for the past 3
months.
Example:
For the month of January: Form 2550M must be filed on February
20.
For the month of February: Form 2550M must be filed on March
20.
For the month of March: Form 2550M is not necessary, because you
only file the monthly tax return for the first 2 months of each
taxable quarter. Rather, file form 2550Q, on or before April 25.
Monthly returns are Provisional in nature
If you made an error for the first 2 months in filing the monthly returns,
you can correct in in the quarterly return because the monthly returns
are provisional in nature. Hence, they are subject to adjustments upon
filing of the Quarterly Return.
Determination of Liability | Quarterly
The liability will be determined, not in date of filing the monthly return
because they are subject to adjustments, but rather upon the filing of the
quarterly return
No Annual VAT Return
There is no such thing as Annual VAT return under the law
Until when can he file for an administrative claim for refund?
Under the law, the last day of filing must be within two (2) years from the
close of the taxable quarter when the purchases were made. Hence:
• Purchases in January 2018 – March 31, 2020
• Purchases in February 2018 – March 31, 2020
• Purchases in March 2018 – March 31, 2020
• Purchases in April 2018 – June 30, 2020
Suppose:
If the TP is not engaged in Export Sales, but rather he is engaged in retail
business that is subject to 12% VAT.
Will he file under 112 or 229?
Section 229, because the IV is not attributable to a ZR/EZR transaction.
Until what time can he file?
Two (2) years from the date of payment. ‘Date of payment’ refers to the
date when the tax has been finally determined. In this case, the date of the
filing of the Quarterly Return.
Recourse of TP not engaged in ZR/EZR | Carry Over
Under present RR, if the TP is not engaged in ZR/EZR, they cannot claim
a refund for the unutilized IV. The only recourse of the TP is to carry-over
the said unutilized IV

ii. Income Tax Return TP Ceased Business Operations

If the TP already ceased of business operations, it can claim for refund
Individual Taxpayers under Section 229 for Overpayment.

Coverage Note: Refund for Overpayment of tax is only available when the TP
BTP ceased its business operations.

Annual | When filed? In Seagate Case: Seagate is not engaged in ZR or EZR, rather it is a VAT
April 15th of the following year. exempt entity. A VAT exempt entity can still claim of unutilized IV if
Seagate is a VAT registered entity. Seagate is a VAT registered entity;
Quarterly | When filed? therefore, it can claim unutilized IV, under Section 112. Because, it refers
Under the TRAIN law: to unutilized IV.
1Q – May 15
2Q – August 15 Seagate Case is the XPN: This is the exception to the general rule that IV
3Q –November 15 must be attributable to ZR/EZR transactions.

It is always 2 months after the close of the quarter Southern PH Power Corp. v. CIR
G.R. No. 179632, 19 October 2011
Corporate Taxpayers Requirements of VAT Refund

Quarter | When filed? SPCC is engaged in the business of generating and selling electricity to
60 days after the close of the taxable quarter NPC. NPC is exempt from direct and indirect and the charter of NPC
1Q – 60 days after March 31st exempts its suppliers from both taxes. Hence, there is an EZR between
2Q – 60 days after June 30th SPPC and NPC. The IV was acquired from the transaction with its
3Q – 60 days after September 30th suppliers. Thus, the transaction is subject of refund under Section 112.

Annual | When Filed CTA rejected the claim for refund since the OR did not bear the word
April 15th of the following year ‘Zero Rated’ and it was not indicated in the quarterly VAT returns. SPPC
contended that the words ZR is imprinted in its sales invoices. However,

71 | KAMM Notes

it was also rejected by CTA because it was required under the law that
the word ZR must be imprinted
Ruling:
In Section 112, a VAT registered entity should issue a receipt or an
invoice. Hence, the receipts and invoices were not distinguished. Under
Section 237, the difference between invoice and receipt was not also
made
In the case of Seal Oil Petroleum, it was held that invoice can be used as
memorials of the commercial transactions, and it will hold probative
value. Section 108.1, the words ZR must be imprinted in the invoices. It is
under RA 9337, the word ZR must be imprinted in OR. The current law
only covers Section 108.1, NIRC, at the time the admin claim was filed.
CTA rejected the claim because SPPC did not include the ZR Vat Returns.
While it is true, it is not ground to outright deny the claim especially when
there are documents and justifiable reason for the claim of refund.
S112 | Requirements (Bar)
(1) The TP must be a VAT registered entity
(2) The TP is engaged in ZR/EZR transaction
(3) The Input Taxes (IT) are due or paid
(4) The IT are not TIT (Transitional Input Tax)
(5) The IT have not been applied against Output Taxes (OT) during and
in the succeeding quarters (No Carry Over)
(6) The IT claimed are attributable to ZR/EZR
(7) For ZR sales under Section 106(A)(2)(1) and (2); 106(B); and
108(B)(1) and (2), the acceptable foreign currency exchange
proceeds have been duly accounted for in accordance with BSP RR
(8) Where there are both ZR/EZR sales and taxable or exempt sales,
and the IT cannot be directly and entirely attributable to any of
these sales, the IT shall be proportionately allocated on the basis of
sales volume; and
(9) The claim is filed within two (2) years after the close of the taxable
quarter when such sales were made.
‘Mixed Transactions’ - Transactions which include ZR and those subject
to 12%
Case Highlights
• There is a big difference between Invoicing Requirements of Official
Receipts and Invoices. Under the present rule, the word ‘ZR’ must
be submitted in the Official Receipts only. (Northern Mindanao). In
fact, the TP is mandated to submit Official Receipts to the CTA in
order to evidence the IV
• The failure to imprint ZR in the VAT Return is not considered as
ground for the denial of the refund, because it is only required to be
imprinted in the OR.
• All the criteria must be present in order for the claim to fall under
Section 112.
CIR v. Mirant
G.R. No. 172129, 12 September 2008
Landmark Case | Mirant Doctrine
Mirant is engaged in the generating and selling of electricity to NPC. From
April 7, 1993 to September 6, 1996, it secured the services of Mitsubishi
to construct its plant which is necessary to the generation of the
electricity to be sold to NPC. Mitsubishi shifted the VAT to Mirant but
Mirant does not want to pay under the belief that it is exempt from VAT
(because of the transactions made with NPC). Mitsubishi advanced the
payment for the VAT but later Mirant paid the VAT (it refused payment
before). However, it did not pay for the tax due during the period of 1993-
1996. It only paid for the taxes due in 1998.
Is it a proper subject of a refund under Section 112?
Yes.
(1) Mirant is a VAT Registered entity;
(2) The transaction between Mirant and NPC is considered as EZR;
(3) The IV is due, even if it was paid at a later time; and
(4) The IV is still attributable to an EZR, because the services it acquired
from Mitsubishi is still considered as attributable to the transaction with
NPC i.e. the generation and sale of electricity
Mirant is engaged in both transactions i.e., EZR and transactions subject
to 12% VAT. This is considered as a Mix Transaction. Therefore, the IV
must be proportionately allocated depending on the sales volume
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Was the Administrative Claim for Refund filed on time?
Mirant: We paid the tax on April 14, 1998. Thus, we have until April 14,
2000 to file a refund, and we filed it on December 1999. Hence, it was filed
on time.
CIR: It was filed out of time. It was already barred by prescription
Ruling (Mirant Doctrine):
The claim was already barred by prescription.
Under Section 112, NIRC, the administrative claim for refund must be
filed two (2) years from the close of the taxable quarter when the sales
were made. It does not speak of date of payment as the reckoning date,
but rather from the close of the taxable quarter when the sales were
made.
In this case, the reckoning period must be from the date of purchase i.e.
sales made from April 7, 1993 to September 6, 1996. The reckoning
period shall be its close of the taxable quarter which is September 30,
1996.
Thus, Mirant can only file its admin claim for refund until September 30,
1998.
Mirant Doctrine (Bar/Exam/Quiz): A claim for refund under Section
112 must be filed within two (2) years from the close of the taxable
quarter when the sales were made, and not from the date of payment of
tax or filing of the return.
CIR v. Aichi Forging Company
G.R. No. 184823, 06 October 2010
(Bar/Quiz/Exam)
Aichi Doctrine: Under RA 8424, in filing a judicial claim for refund under
Section 122, the 120-day period is mandatory and jurisdictional. Non-
compliance with the 120-day period granted to the CIR to act on the claim
will result to the dismissal of the judicial claim for refund on the ground
of lack of jurisdiction by the CTA over the case.
Aichi is registered DC with the BIR as a VAT entity and its steel products
are registered with the BOI as a pioneer status. It filed for an
administrative and judicial claim for refund/credit of input VAT with the
CIR on September 30, 2004 for the ZR sales for the period of July 1, 2002
to September 30, 2002.
Aichi filed a judicial claim for refund and an administrative claim for
refund, both in September 30, 2004.
Were the claims for tax refund/credit filed within the 2-year
prescriptive period provided in Sections 112(A) and 229 of NIRC?
The Administrative Claim
was filed on time
Section 112(A) of the NIRC is the applicable provision in determining the
start of the two-year period for claiming a refund/credit of unutilized
input VAT, and that Sections 204(C) and 229 of the NIRC are inapplicable
as "both provisions apply only to instances of erroneous payment or
illegal collection of internal revenue taxes."
The Court held that respondent's petition (filed on April 14, 2000) was
filed on the last day of the 24th calendar month from the day respondent
filed its final adjusted return. Hence, it was filed within the reglementary
period.
Applying this to the present case, the two-year period to file a claim for
tax refund/credit for the period July 1, 2002 to September 30, 2002
expired on September 30, 2004. Hence, respondent’s administrative
claim was timely filed.
The Judicial Claim
was not filed on time
Aichi did not observe the mandatory 120-day rule that is prescribed
under Section 112, RA 8424. Section 112 provides that the CIR is given
120-days from the receipt of such documents to decide on the admin
claim for refund.
72 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

appeal the decision with the file an appeal the decision with
Aichi did not wait for the lapse of the 120-dayperiod nor did it wait for CTA(Implied Denial) the CTA
the decision of the CIR before filing the judicial claim for refund. Since the
120-day period was not observe, the CTA did not acquire jurisdiction If the CIR did not act upon it,
over the claim. there can be a criminal case
against the revenue officer
Aichi | Section 112, RA 8424, Envisions Two (2) Scenarios:
(1) There is a decision | When the decision is issued within the 120- Note: There is no longer an
day period – the TP has 30 days from the receipt of the decision to implied denial.
file a PFR before the CTA; and
(2) Inaction | If no decision is made within the 120-day period – the TP ii. Section 229
has 30 days from the lapse of the 120-days period to file a PFR
before the CTA Period to file
It should be filed within the same two (2) year period from the date of
Notes for the Bar: payment. However, there is a pre-requisite.
Admin Claim for Refund
Use ‘written claim for refund’ filed with the CIR instead of admin claim for Pre-requisite for the PFR before the CTA
refund for Bar purposes GR: There must be a written claim for refund or credit filed before the CIR.
Judicial Claim for Refund Otherwise, the PFR will be dismissed on the ground of failure to comply
PFR filed before the CTA also called Judicial Claim for Refund with the DEAR doctrine.
XPN: Apparent overpayment or erroneous payment appears on the face
Administrative Claim for Refund of the return

i. Section 112 In Practice/Jurisprudence: If the date of expiration for the two-year

Reckoning Period | From the Close of Taxable Quarter
Thus, under Section 112, NIRC, unutilized input VAT payments not
otherwise used for any internal revenue tax due the TP must be claimed
within two (2) years reckoned from the close of the taxable quarter when
the relevant sales were made pertaining to the input VAT regardless of
whether said tax was paid or not
period is still far ahead, you need to wait for the decision of the CIR,
otherwise, the claim will be dismissed by the CTA because of the DEAR
Doctrine.
If the two-year period is about to lapse, the TP must file an admin claim
for refund, even if there is no decision because the only requirement
under the law is that there must be a filing of the written claim for refund.

ii. Section 229 CIR v. San Roque; Taganito v. CIR; Philex v. CIR
G.R. No. 187485, 196113 & 197156, 12 February 2013
Reckoning Period | Date of Payment
Under Section 229, no such suit or proceeding shall be filed after the SAN ROQUE TAGANITO PHILEX
Registered with BOI (ZR). Registered with BOI (ZR). Registered with BOI (ZR).
expiration of two (2) years from the date of payment of the tax or penalty
Export Sales. Export Sales. Export Sales
regardless of any supervening cause that may arise. Moreover, it only Acquired IV for purchases Acquired IV for purchases Acquired IV for purchases
applies to instances of erroneous payment or illegal collection of internal made in 2001 made in 2005 made in 2005
revenue taxes. ACFR: March 28 2003 ACFR: Nov 14 2006 ACFR: Mar 20 2006
Amended: Nov 29 2006
Filed within the 2-year Filed within the 2-year
Judicial Claim for Refund period Filed within the 2-year period
period
JCFR: April 10 2003 JCFR: Feb 14 2007 JCFR: Oct 17 2007
i. Section 112
Ruling Ruling (Quiz) Ruling
Filed prematurely. Hence, The claim is allowed. Filed out of time. Hence, it
Period to file it should be dismissed should be dismissed,
Within 30 days from the receipt of the decision of the CIR on the Admin based on lack of It can invoke BIR Ruling DA because it is mandatory
jurisdiction. 489-03 as the exception to and jurisdictional
Claim for Refund the 120-day period

Deleted provision in RA 8424: ‘or after the lapse of a certain period within Under the DA, premature
filing had been relaxed by
which to decide’ the CIR in this particular
case. The DA is effective
Period in which the CIR should decide on the Admin Claim for only during December 10
2003 until October 5 2010
Refund
Within 90 days from the date of submission of the relevant documents
Note: Under TRAIN Law, everything should be dismissed
for refund.

Effect on failure to act or decide History/Summary of the rule

There can be a criminal case against the revenue officer Prior December 10 2003 – premature filing not allowed
During Dec 10 2003 until Oct 5 2010 – premature filing of JCFR allowed
Thus, unlike RA 8424, failure to act does not result into an implied After Oct 5 2010 – premature filing not allowed (upon promulgation of
denial of the administrative claim for refund. the Aichi Doctrine)

Filing without a receipt of CIR decision Recourse

The judicial claim for refund is considered to be premature File a criminal case against the CIR revenue officer

RA 8424 TRAIN law Compliance Requirements

CIR shall grant the refund, within
120-days from the date of
submission of complete
documents in support of the
application
In case of full denial or partial
refund or the failure for the CIR
to act within the period, the
applicant within 30 days or after
the expiration of 120- day period
CIR shall grant the refund, within
90 days from the date of
Registration & Invoicing Requirements
submission of official receipts, or
invoice or the complete
Western Mindanao v. CIR
documents in support of the
G.R. No. 181136, 13 June 2012
application
TP is WMPC who is engaged in production of electricity. TP is VAT
In case of full denial or partial
registered. The transaction is the sale of electricity to NPC. NPC is exempt
refund or the failure for the CIR
from direct and indirect tax. In its amended charter, all transactions
to act within the period, the
dealing with NPC shall be exempt. Hence, it is considered as an EZR
applicant within 30 days after
transaction. Hence, there is an Output VAT but it will be computed at 0%
the receipt of the decision may

73 | KAMM Notes

rate. So, there is VAT but there is no tax liability. However, there is Input
VAT because the TP is a VAT registered entity
Under Section 112 of Tax Code, a VAT TP shall file within 2 years for a tax
credit or refund. WMPC filed a refund before the BIR.
Note: EZR Transaction is one where the TP had entered a transaction
with an entity which is exempt from direct and indirect tax and a special
law or an international agreement subjects such transaction to a 0% rate.
Provided, that the law also grants exemption in favor of individuals
dealing with the Tax-Exempt Entity
Ruling:
In a claim for tax refund, the claimant must not only show that he is
entitled on such claim under substantive law, but it must also show that
it complied with the documentary and evidencing requirement provided
by the law.
Remember:
(1) Legislative Approval by Reenactment: When Congress had
adopted the provisions of and RR (e.g., RR 7-95), and it makes it
valid
(2) In case the transaction is classified as ZR, then the TP can avail of
Input VAT. If there is an excess Input VAT aka Creditable Input VAT
during the taxable year, such can be subject of an application for
refund.
(3) In an application for a refund of unutilized Input VAT, it is necessary
that the TP must comply with the Invoicing Requirements of the
Government.
Invoicing Requirements
under RR 7-95, replicated in Section 13 of RA 9337
One of the requirements under RR 7-95 is that the word “Zero-Rated”
must be imprinted on the invoice or receipt, so that it will be granted such
tax credit or tax refund.
Non-compliance | Denial of refund
Non-compliance is a ground for the denial of the application for refund of
the unutilized input VAT.
Silicon PH v. CIR
G.R. No. 172378, 17 January 2011
Silicon is a registered VAT; TP is engaged in the manufacture of
integrated circuits. Application of refund/credit for unutilized Input VAT.
CTA denied the application because Silicon failed to print the Authority
to Print (ATP) and it did not also indicate the word “Zero-Rated” in its
invoice or receipts.
Silicon argued that ATP is not required under the law.
Is ATP required in an application for refund?
Fatal: Non-presentation of ATP
Non-fatal: Failure to indicateATP in the invoice/receipt
Hence, failure to indicate the words “ATP” in the receipt/invoice is not a
ground for the denial of the application for tax refund or tax credit.
However, the TP, prior to the printing of the invoice, must present its ATP
before the BIR.
Four requisites in the application of tax refund/credit:
(1) The TP must be VAT registered entity
(2) The TP must be engaged in a sale involving ZR Transaction
(3) The administrative claim before the BIR must be made within 2
years after the close of the taxable year when the sale was made;
and
(4) The creditable tax made must be attributable to the sales except
transitional sales
Invoicing Requirements
(1) The word “Zero-Rated”
(2) The word VAT must be indicated in the receipt; and
(3) The TIN of the TP must be indicated in the receipt
Other than these requirements, the TP must have a duly registered
invoice
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Duly registered invoice or receipt
An invoice must have a BIR ATP. If the invoice did not contain any ATP
then that it is not one that is duly registered.
Hitachi Panasonic v. CIR
G.R. No. 147212, 20 October 2010
TP has secured a BIR ATP but has failed to indicate that such ATP is in its
receipt
Will the invoice still be considered as a duly registered?
Yes, because the TP still secured a BIR ATP. H ````````````````````````````````ence,
failure to indicate is not a ground to deny the application or claim for
refund, as long as there is an ATP.
In the case of Silicon v. CIR
Silicon did not present an ATP, which led to the conclusion that Silicon
did not secure the ATP. If Silicon did not obtain an ATP, then the invoice
of Silicon is not considered duly registered. Hence, it is already
considered a denial for refund, because the failure to present an ATP, will
lead to the conclusion that the TP did not secure an ATP, hence, the
invoice or receipt is not duly registered.
CIR v. Manila Mining Corporation
G.R. No. 153204, 31 August 2005
(Bar)
Doctrine: Original Invoice or Receipts must be submitted
Manila Mining is VAT registered entity. It sold Gold to BSP and according
to the letter of the CIR, sale of Gold to BSP is considered as an export sale.
Thus, it is a ZR
transaction. Moreover, the entity claiming for such must be VAT
registered entity.
Manila Mining applied for a tax refund and TCC. CIR questioned the filing
of the application because it did not present the original sales invoice and
receipt of the transaction and it did not file before the CIR with the
original one. What was submitted was a summary list of the transactions
or invoices made by an independent CPA.
Ruling:
Under RR 3-88, original copies of the invoice and receipts must be
submitted to the CTA for its evaluation. Otherwise, the application must
be denied.
Note: Sale of gold to BSP is now considered as VAT Exempt transaction
Northern Mindanao Power Corporation v. CIR
G.R. No. 185115, 18 February 2015
Original Receipts v. Company Sales Invoice
Northern Mindanao sells electricity to NPC. It filed an application for tax
refund before the CIR for its Input VAT on its ZR Transactions. However,
it only presented company sales invoices, instead of the original receipts.
The application was denied because of the lack of imprint of the words
“Zero-Rated” on their invoices.
Ruling:
Period to file
The administrative claim for the Tax Refund for ZR transactions shall be
filed before the BIR within two (2) years counted from the end of the
taxable quarter. In this case, Northern Mindanao did not file its petition
timely.
Printing of the word “Zero-VAT”
It was not printed in the official receipts of Northern Mindanao, that’s
why it was not acknowledged by the Court. It is fatal for the claimant to
not print the word “Zero-VAT” in its receipts.
Official Receipts v. Company Sales Invoices (Quiz)
In this case, Northern Mindanao only presented company sales invoices
to represent its transaction with the NPC. The Court said that invoices are
not adequate, what is required is the official receipts.
The ‘company sales invoice’ is only a written account for the services
rendered by Northern Mindanao to NPC for the goods
74 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

The power belongs to the Congress. It cannot belong to the CIR.

Reason for differentiation
Procedural Requirement: What has to be submitted to the Court is the
Official Receipt and not the Invoice.
Suppose:
The words “Zero-Rated” has been imprinted on the invoice and it has not
been imprinted in the Official Receipts.
Should it be a ground for the denial of the claim for refund?
Yes, because what is required is that the word “Zero-Rated” must be
imprinted on the Official Receipts.
American British Tobacco v. Camacho
G.R. No. 163583, 20 August 2008
RA 8420 was made effective in January 1997. In June 2001, American
British introduced Lucky Strike, Mentol Light and Lucky Strike filter. RR
9-2003 provides that the new brands should be classified based on the
net retailed price. RMO 6-2003 provides for periodic reclassification of
the new brands every two years, or earlier as provided by the CIR.
Ruling:
No violation of the Equal Protection Clause because the State has the
power to elect the subject of taxation i.e. articles, goods, etc.

In the case of Western Mindanao v. CIR
Where should the word “Zero-Rated” be imprinted, on the receipt
of NPC or on the receipt of WMPC or on the supplier of WMPC?
On the WMPC receipts, because, the Input VAT did not arise from the
transaction between NPC and WMPC but from the transaction between
WMPC and its suppliers.
The court also applied the Rational Basis test i.e. that there is substantial
distinction between the new and old brands. Upon the enactment of RA
8420, the new brands were not existing at that time, for practical reasons,
the Congress provides for this parameter.
RR 9-2003, RMO 6-2003 and RR 22-2003 were invalid because it
empowers the CIR to reclassify the new brands every two years or earlier

What invoices/receipts must WMPC be submitted? Note: Nowhere in the RA 8420 that grants power to CIR to reclassify the
brands, it merely provides for the reclassifications. Under RA 8420, the
It must submit two (2) receipts: classification shall be effective upon the approval of the Congress. The
(a) The receipts coming from both transactions i.e.the transaction it power to reclassify still belongs to the Congress.
made with the NPC, and
(b) the receipts with respect to the transactions it made with its Can the Congress exercise supervision over the functions of
supplier. administrative bodies?

Withholding of Final VAT on Sales to Abakada Guro v. Purisima

G.R. No. 166715, 14 August 2008
Government
RA 9335 covers all employees of both agencies regardless of their
Administrative and Penal Sanctions employment status as long as they have already rendered at least six
months of service.
PERCENTAGE TAXES: CONCEPT AND
The DOF, DBM, BIR, and CSC were tasked to issue and implement the IRR
NATURE of RA 9335 subject to the approval of the Joint Congressional Oversight
Committee of the Congress

EXCISE TAX: CONCEPT AND NATURE Ruling

DOCUMENTARY STAMP TAX: Issue on Undue Delegation

CONCEPT AND NATURE In order for a valid delegation of legislative power there must be two tests
that must be conducted (Quiz/Exam):
(1) Completeness Test: A law is complete when it sets forth therein the
INTERNAL REVENUE TAX policy to be executed, carried out or implemented by the delegate.
ADMINISTRATION, ENFORCEMENT (2) Sufficient Standard Test: It lays down a sufficient standard when it
provides adequate guidelines or limitations in the law to map out
& REMEDIES the boundaries of the delegate’s authority and prevent the
delegation from running riot.
Tax Administration: Its General Concepts
Note: RA 9335 adequately states the policy and standards to guide the
President in fixing revenue targets and the implementing agencies in
Stage of Tax System
carrying out the provisions of the law. Hence, the president will merely
(1) Levy – enactment of law
perform a ministerial act.
(2) Assessment – computation
(3) Collection– pecuniary in character, hence it cannot pay in kind i.e.
‘Revenue targets’ refers to the original estimated revenue collection
‘manok’
expected of the BIR and the BOC for a given fiscal year as stated in the
Budget of Expenditures and Sources of Financing (BESF) submitted by
Branch of the Government exercising such powers
the President to Congress.
Levy - The Legislative Branch of the Government has the power to
exercise taxes because the power to tax is inherently legislative
Separation of Powers
Assessment & Collection - The Executive Branch because this function
does not pertain to the power of taxation, rather it refers to the enactment
Note: The Congress cannot indicate in the law that any IRR shall be
of tax laws
subject to its approval otherwise it will violate the Separation of Powers.
This is already considered as Scrutiny.
Agencies Tasks to Collect Taxes
Depends of the type of tax involved
The Section creating the committee is unconstitutional because the
(1) NIRC taxes –BIR
moment the law becomes effective, any provision that empowers the
(2) Custom Duties – BOC
Congress to create a role in the implementation of the law is a violation of
(3) Automobile Registration Fee (regulatory tax) – LTO
the principle of separation of powers

Extent of Congress’ Power in Tax

Bureau of Internal Revenue
Administration
Composition and Functions
Power to Classify

75 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

SEC. 3. Chief Officials of the BIR. - The BIR shall have a chief to be known as CIR, Section 246 NIRC
hereinafter referred to as the Commissioner, and four (4) assistant chiefs to be known Rulings and RR must have prospective application
as Deputy Commissioners.

In cases of revocation, modification or reversal of a ruling:

Power and Functions
GR: It will not have retroactive effect if it will prejudice the right or
SEC. 2. Powers and Duties of the BIR - The BIR shall be under the supervision and control
interest of the TP.
of the DOF and its powers and duties shall comprehend the assessment and collection
of all NIR taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and XPN: It will not prejudice the right of the TP.
fines connected therewith, including the execution of judgments in all cases decided in
its favor by the CTA and the ordinary courts. The BIR shall give effect to and administer Note: It is not the ruling which will prejudice the TP, rather the
the supervisory and police powers conferred to it by this Code or other laws. revocation, modification or reversal of the ruling

In General Burroughs v. CIR

G.R. No. L-66653, 19 June 1986
Two Functions of the CIR
(1) Interpret Tax Laws; and Remittance in 1979 – 15% BPRT was imposed on the amount actually
(2) The Function to decide Disputed assessment, Refund, Other remitted plus on the amount earmarked for remittance.
matters administered by the BIR or Tax Code and other special BIR Ruling in 1980 – 15% BPRT shall be imposed on the amount actually
laws, and Penalties (DROP) cases remitted only.
RMC 8-82 in 1992 - 15% tax shall be imposed on the amount actually
Sec 4, NIRC | Appellate body applied for before the BSP (Central Bank). Technically, it revoked the BIR
The appellate body that governs: ruling in 1980.
(1) Interpretation of the tax laws – SOF
(2) DROP cases – CTA Burroughs claim for refund banks on the claim that the tax not based on
the amount actually remitted or earmarked for remittance. Rather, BIR
Courage v. CIR taxed them based on amount actually remitted + amount earmarked for
G.R. No. 213446, 3 July 2018 remittance
(Bar)
Can Burroughs claim a tax refund?
The association of government EEs who questioned the issuance of tax
RR stating that their benefits shall be subject to tax. Imposition of tax on Yes. Pursuant to Section 327, now 246 of the NIRC. There should be a
their salaries will violate the doctrine of separation of powers. nonretroactive application of the ruling, because it will prejudice the
corporation on the erroneously paid BPRT.
Ruling
The RR has been declared null and void because all the provisions (i.e., on Rules | Non-Retroactive Application
the 90,000 parameter and de minimis) will likewise apply to government Check if the provision of the law is clear and categorical. If the CIR issued
EEs. a ruling which contravenes the provision of the law, you cannot apply
246. Such that, the “TP cannot acquire vested right on the wrong
Interpretation of Tax Laws interpretation or construction of the law” (PB COM Case)

SEC. 4. Power of the CIR to Interpret Tax Laws and to Decide Tax
Cases. - The power to interpret the provisions of this Code and other tax
laws shall be under the exclusive and original jurisdiction of the CIR,
subject to review by the SOF.
The power to decide DROP cases, or other matters arising under this Code
or other laws or portions thereof administered by the BIR is vested in the
CIR, subject to the exclusive appellate jurisdiction of the CTA.
If the provision is not clear and categorical. The TP can rely on the ruling,
if the TP relied in GF, apply Section 246.
In Burroughs, the law is not clear and categorical because of the use of
“or”. Shifting of BIR ruling. PBCOM cannot apply because the provision of
the law is not clear on the interpretation of the BPRT. Burroughs filed a
claim in GF.

How CIR Interpret Tax Laws
CIR will interpret the tax laws through the issuance of RMO, BIR Rulings,
etc.
In the case of CIR v. Fortune:
Legislative Ruling
It implements the
framework of the law
The same as a RR (because it
provides details for the basic
framework of the law sought to
be implemented). Hence, there
must be compliance with Notice
and Hearing, and Publication
otherwise there may be a
violation of Due Process (both
substantial and procedural)
Note: The CIR cannot issue a RR.
RR v. Ruling
RR– issuance of SOF upon the recommendation by the CIR
Ruling – it is issued by the CIR or its subordinates.
Hence, Burroughs can rely on the ruling in GF in BIR Ruling 1980. RMC 8-
82 cannot apply retroactively because it will prejudice Burroughs.
PBCOM v. CIR
G.R. No. 112024, 28 January 1999
Reliance on the wrong construction or interpretation of law
Administrative Ruling
It provides guideline (because it
basic Under Section 229, the claim must be filed within 2 years, but the BIR
is merely the best guess of the
issued an administrative issuance stating that the period to file a refund
CIR)
is not 2 years but 10 years in accordance with the Civil Code.
PB COM filed a refund beyond the 2-year period but within the 10-year
period.
No publication is necessary
because the bare issuance
Can PB COM acquire vested right?
thereof is valid.
A TP cannot acquire a vested right on a wrong construction or
interpretation of the law.
Accordingly, here can be a retroactive application of the law because PB
COM cannot rely on a wrong interpretation of the law.
i. Operative Fact Doctrine

Noble Issue | Cannot be issued by a subordinate CIR v. San Roque

However, only the CIR can issue rulings of first impression which G.R. No. 187485, 12 February 2013
Operative Fact Doctrine
does not cover RR because the CIR cannot issue RR. RR are only
being issued by the SOF upon the recommendation of the CIR.
DA 489-03 – Premature Filing
Hence, interpretation of tax laws pertains to rulings.

Operative Fact Doctrine

i. Non-Retroactivity of Rulings
GR: A void law or administrative act cannot be a source of legal right

76 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

XPN: Operative Fact Doctrine, if there is a judicial declaration of its

invalidity, then it does not obliterate the effects and consequences of its LOA is Mandatory
invalidity. Lack of LOA makes the assessment void

Note: A TP can be deemed to have relied on a in GF if the provision of the Suppose:

law is complicated and subject to different interpretation.
However, if the provision of the law is clear and unequivocal or it is not
subject to different interpretation, then you cannot apply 246.
Burroughs v. PB COM
In Burroughs, a provision of the law is complicated, subject to different
interpretations.
In PB COM, the provision of the law is not subject to different
interpretation, rather it is clear and unequivocal.
A client is engaged in leasing instruments to a corporation. The
corporation declared rent expense of ₱10,000,000. The client only
reflected an income of ₱7,000,000. Hence, there is a disparity of
₱3,000,000. It was found out that CIR did not examine the books of the
client, it only examined the books of the corporation. Hence, CIR assessed
the client for the deficiency.
The client did not receive any LOA, it only received a Letter Notice from
the CIR, stating that the corporation reflected ₱10,000,000 and the client
only reflected ₱7,000,000.

Note: The DM 489-03 (in Taganito Case) is also subject to different Remedy/Defense
interpretations. Hence, a TP can rely on it in GF. SM uses the accrual method. The client (engages in service business)
adopts the cash method. The client did not reflect the ₱2,500,000 because
ii. Cases that may or may not be elevated to the CTA of an A/R. Hence, only a ₱500,000 disparity.

CIR v. Courage Letter Notice vis-à-vis Letter of Authority

G.R. No. 213446, 3 July 2018 Letter Notice – there was an informer (most probably)
(Bar) Letter of Authority – the authority given to the revenue officers to exercise
the powers given to the CIR
Ruling on the Appeal Process:
CIR v. Liquigaz
Petitioners failed to exhaust DEAR G.R. No. 215534, April 18, 2016
Lack of LOA
Section 4, NIRC, it must be filed from CIR to SOF. However, it does not
provide any other court after the appeal to SOF. It is necessary that a LOA be issued to a TP in order for the assessment to
be valid. Absence of LOA, there can be no valid assessment, it will violate
The Court held that the adverse decision of CIR must be reviewed by SOF, the due process clause of the PH Constitution
within 30 days from receipt. It must be in writing and under oath, in a
request for a review. CIR v. Sony PH
G.R. No. 178697, 17 November 2010
Violation of Hierarchy of Courts Coverage of LOA

CTA is created by RA 1125. If the CIR issued administrative ruling in
accordance with its quasi-legislative power, it is subject to review of the
SOF and it is appealable to CTA.
Section 7, RA 1125. In dealing with DROP cases, it must be filed before the
CIR, and it is appealable directly to the CTA, via petition for review.
Subsidy to Sony PH from Sony SG
Remedial/Procedural Aspect:
The CIR issued a LOA to Sony PH. The LOA indicates 1997 and unverified
prior years. They examined the books of Sony PH for the taxable year
1997 until March 1998. After examination, the CIR issued an assessment.

As an exception, cases with respect to local tax laws, the case must be filed Is the assessment valid?
before the CIR, to RTC, and to CTA.
The assessment will only be valid with respect to the taxable year 1997
Appeal Process because it is properly covered in the LOA issued by the CIR. The
Interpretation of Tax Laws DROP Cases assessment with respect to January 1 to March 1998 is void, because the
Quasi-Legislative Quasi-Judicial
LOA did not cover such period.
CIR
CIR
SOF
CTA Division (RTC if Local Tax) Is the CIR prohibited from issuing a LOA which indicates more than
MR/MNT before the CTA Division 1 taxable year?
CTA En Banc
Supreme Court No. Provided, all the taxable years must be specifically indicated in the
LOA. The unverified prior years is not allowed, because it was not
Note: specifically indicated in the LOA.
• RMO/CMC are issued in the exercise of the quasi-legislative
function of the CIR. ii. Third Party Verification Rule
• Questioning the assessment is a quasi-judicial function, because it
pertains to a decision on a disputed assessment. Definition
The cross reference of other TPs to other individuals or to the gov’t
officials.
Examination of Books of Accounts
Trivia: LGU and BIR can coordinate to each other with respect to
i. Requirement of Issuance of a Letter of Authority (LOA)
declaration of Gross Receipts or Gross Sales.

Books of Accounts – those records which would show the business

iii. Inquiry into Bank Deposits
activities of the TP
GR: CIR cannot inquire or look into the Bank Deposits of TP because of
Authority to Examine the Books
the Bank Secrecy Law.
CIR is the one who is authorized to examine the books of TPs. However,
XPN:
it is the revenue officers who will actually examine such, and not the CIR.
(1) When it pertains to the determination of the gross estate of the TP;
The authority is vested upon the CIR. Hence, a LOA is mandatory in order
(2) When there is an application of compromise on the ground of
for the revenue officer to be authorized.
financial inability to pay the tax;
• The TP must execute a written waiver of the privilege of the
‘Letter of Authority’ – an official document which authorizes a revenue
TP provided under the Bank Secrecy Law
officer to examine the books of accounts of TP/individuals transacting
with the TP.
77 | KAMM Notes

(3) When a specific TP is subject of a request of information of a foreign
tax authority, pursuant to an international tax agreement or tax
treaty to which the PH is a signatory
Trivia: Package 2, TRAIN Law - they included a rider provision which
speaks of the relaxation of the Bank Secrecy Law.
iv. Summon Persons; Take Testimony
Power to Summon
Within the power of the CIR
How?
The CIR can summon any individual who has information with respect to
the transaction of a TP.
In fact, the CIR can accept an info or sworn statement coming from an
informer.
Consent
The consent of the TP is not necessary, pursuant to the summons via
subpoena, it was obtained through a valid procedure. The BIR is not
governed by the technical rules of procedure being an administrative
agency of the government.
Fitness by Design v. CIR
17 October 2008
Section 222(A), NIRC. The CIR has the authority to assess deficiency taxes
within 10 years (extraordinary assessment – discussed later) from
knowledge of the fraudulent act.
A former bookkeeper of the company who had supplied the information
to the BIR, the bookkeeper had given the books of accounts to the CIR
without the consent of the corporation. The BIR used the testimony and
the books of the corporation.
Does the CIR have the power to summon persons to provide
information regarding the TP without his consent?
The CIR has the power to summon or have a person to testify against
those who violated the provisions of the Tax Code. In this case, the
written interrogatories were issued to summon the informant for the tax
violation committed during the 1995.
Can the BIR utilize the documents even without the consent of the
TP?
Yes. Because under NIRC, the functions of the CIR have been granted in
order to ensure the collection of taxes from different. Acquiring consent
would defeat the purpose to collect.
Cross-Examination
Fitness was not given the opportunity to cross examine the witness
because the case is not a criminal prosecution
v. Commencement Order by a Rehabilitation Court
Commencement Order signifies the start of the rehabilitation
proceedings. Once the rehab proceedings start, a creditor cannot collect
anymore. However, you can file a claim before the rehabilitation court.
BIR v. Lepanto Ceramics
(Bar)
Rehab Court issued a Commencement Order. Notwithstanding such
order, the CIR served upon Lepanto a NOA and a demand.
Is the assessment proper?
This is improper. Because, no individual can collect the obligation against
the TP once the rehab proceedings start. Notwithstanding the order, the
officers held in contempt.
Power to Assess and Prescribe Requirement for
Tax Administration
i. Power to Examine Returns
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
All the returns that had been submitted to the BIR shall be subject to the
examination of the BIR officers.
Hence, they can only examine books of accounts which are not in their
custody, because these books are not required to be submitted to the CIR.
You only submit the returns and alpha lists
(a) Amendment of Returns
Withdrawal of Return | Prohibited
A return, once filed, can no longer be withdrawn. The remedy is
amendment
Suppose:
A Car dealer was assessed for ₱10 000 000. The corporation submitted
the return. The corporation realized that the computation in the return is
wrong.
Can you get the return already submitted to the BIR and re-file?
No. A return, once filed, can no longer be withdrawn.
What is the remedy?
Amendment which can only be done within three (3) years from the date
of filing of the return.
Suppose:
In substituted filing, you can directly file your claim before your ER.
Usually, the accountant of the ER will refuse your claim because they
contend that the ER already filed a return
What is the remedy?
Ipilit mo
Mandate of the ER
The ER is mandated to refund the over withheld taxes to the EEs. The ER
is the one in charged in declaring the over remittance in filing of its return
The ER cannot refuse the claim by reason of the return already being
submitted to the government because they can amend their returns, the
fact that they already filed the return does not mean that they can no
longer rectify the errors made in the return.
Period
3 years from the date of filing of the return
Notice of Investigation | Notice of Audit (LOA)
Amendment can no longer be made if a notice of investigation or notice
of audit had already been served upon the TP.
Note: LOA is a notice of audit
(b) Rule on Confidentiality of Tax Returns and the Exceptions
thereto
Confidentiality Rule
GR: When Tax Returns are filed before the BIR, it is not subject to inspection or
investigation. XPN: Order of the president.
BIR v. Ombudsman
11 April 2002
Confidentiality Rule
A subpoena duces tecum was served to the BIR Officer, however, it did
not specify the documents to be produced.
Ruling:
‘Trade Secrets’ only refer to the trade secrets with respect to military,
diplomatic, and other matters. In this case, the documents are not
considered as trade secrets but public records.
They are public records because once the case has been filed before the
court and be part of the case dockets, they are already considered as
public records. Thus, they are not covered by the confidentiality rule.
ii. Power to make a Return
The CIR can prepare the return for the TP if:
78 | KAMM Notes

(1) There was no filing of return or
(2) The TP files a fake or false return
Best Evidence Obtainable Rule (BEOR)
In making an assessment and in preparing for a return for the TP, the
values indicated in the return or assessment must be based on the best
evidence obtainable through the powers and functions of the BIR.
How?
The CIR can summon the TP or individual transacting, the CIR can
perform the 3P verification rule and the CIR can take testimonies. These
are the methods in which the CIR can obtain data in support of its
assessment
Note: Use the case of Hantex if the assessment is without any factual or
legal Basis.
Naked Assessment | Void
Thus, an assessment must not be highly speculative; an assessment must
be based on actual facts and not on speculations or conjectures.
Otherwise, the assessment is considered as a naked assessment, which is
a void assessment.
CIR v. Hantex Trading
G.R. No. 136975, 31 March 2005
Landmark Case
Hantex filed an import entry with the BOC. The acting chief of the
investigation bureau found that it was under declaring the value of the
import furnished by an informer. The Bureau had issued an order for
process and investigation.
The president and GM of Caltex refused to abide with the Subpoena,
because according to them the books were already subject to numerous
investigations made by the BIR. Because of the refusal, the prosecution
office of the BIR opted to secure the documents in a case before the SEC.
The SEC custodian refused because the original copies were eaten by
termites. The prosecution officers also asked to authenticate the machine
copies, but they did not authenticate it, instead they issued a certification
of the entries. The documents boiled down to the un-authenticated
machine copies.
Based on these documents, the CIR issued an assessment to Hantex.
Hantex questioned it because the BIR failed to present the original copy
of the consumption and import accounts. What were only presented are
the machine copies furnished by the informer.
Appeal Process: CTA to CA because RA 9282 was not yet enacted.
BER v. BEOR
Best Evidence Rule – The original copy must be submitted. Not applicable
in tax cases.
Best Evidence Obtainable Rule –This is the principle applicable in tax
cases.
Ruling
Section 6, NIRC – This covers the BEOR, if there is failure to submit
original copies. In making an assessment, it can be obtained through the
best evidence obtainable. It can be obtained the corporate and
accounting records of the TP, it can be obtained from the books and
records of other TPs within the same line, those records which contains
the transaction with the TP, and other records and documents with the
government section i.e. SEC.
However, it shall not cover mere photocopies, because they have no
probative value.
In this case, machine photocopies should not have been presented
because it does not have any probative value. Hence, the CIR should not
have relied on such document for their assessment.
Consumption entries are made in multiple copies, there was no reason
for the CIR to not have copies from other agencies i.e., BOC.
The information of the informer from the informer
The BIR is not guided by technical rules of evidence being an admin body.
However, in this case the hearsay evidence was not accepted because it
was not authenticated, the informer was not presented, and there was no
other supporting evidence i.e., affidavit
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Note:
(1) Photocopies are not allowed as basis of an assessment because of
lack of probative value
(2) Hearsay evidence is allowed as a basis for making an assessment
• Only if it is verified
‘Verified’ – it does not speak of one being under oath, it means that
it is supported or corroborated by other documents (it cannot
stand alone)
CIR v. Embroidery and Garment Industries
G.R. No. 96262, 22 March 1999
Embroidery presented an (1) information coming from an informant;
and (2) a Sworn Statement of the GM – that is was fabricated
Tax Court: This sworn statement is unverified (‘unverified’ does not refer
to verification under the ROC; it pertains to the corroboration of
supporting documents)
Remember:
(1) Informant | An assessment must be based on actual facts proved by
evidence, not merely from an unverified information coming from
an informant. In this case it was not based on actual facts but on
presumptions. Assessments based on presumptions are
considered void assessments.
(2) Sworn Statement | Assessment based on sworn statement without
any sufficient evidence to corroborate such statement, the
assessment is still based on speculation. Consequently, the
assessment is void.
Reason | Best Evidence Obtainable Rule
In preparation of assessment notice, the CIR must exercise the BEOR in
obtaining facts in order to support an assessment
Farcon Marketing v. BIR
CTA Second Division Case 8367, 3 February 2015
Naked Assessment
Farcon: It is not possible for Farcon to present the documents requested
by the BIR because these were destroyed in a flood during the typhoon
Ondoy and “Pepe” -Arce, 2019
BIR: The BIR issued a PAN in favor of Farcon, and subsequently a FLD
Farcon filed a protest and PFR. CIR argues that the AN should be
presumed valid and made in GF unless controverted by the TP. That the
FLD was based on valid documents indicating the income of the EEs of
the TP. Moreover, it contends that BEOR can be used as a GR, but it cannot
be used in this case because the AN was based on the ITR.
Farcon: CIR failed to comply with the principle in CIR v. Caltex, with
respect to BEOR. It is absurd to determine the correctness of assessment
based on the assessment itself.
CTA Second Division: Cancelled the deficiency assessment because they
cannot allow an expense because of failure to submit OR
CTA En Banc: Assessment was considered to be a naked assessment.
Under Section 6B, NIRC, when a report is required by law to be submitted
to a basis for an assessment, and it was believed to be false, the CIR can
make an assessment based on the BEOR.
Ruling
It is undisputed that the accounts of Farcon cannot be obtained because
it was destroyed by the typhoon Ondoy and Pepeng. It was a naked
assessment.
SC allowed such defense by Farcon pursuant to BEOR, and because there
was justification (i.e. destroyed during the typhoon)
Remember: If the Alpha List (list of the ER of EEs which the ER needs to
submit under substituted filing), amounted to ₱1,600,000 total gross
compensation income, such amount must be the amount indicated as
salary in the return. If the return indicated ₱1,800,000, can the BIR will
disallow the ₱200,000? Jacinto Case.
Jacinto v. CIR
14 February 2008
79 | KAMM Notes

There were deficiency income taxes, VAT, CWT, compromise, penalties
and surcharges against Jacinto.
Concentrate on Income Tax.
Jacinto was asked to submit documents to the CIR, however, Jacinto did
not submit. CIR disallowed the expenses amounting to 50% of such
income. CIR used 50% pursuant to a RR which states that if the TP cannot
substantiate its expenses, then only 50% of its expenses shall be
disallowed
Is the assessment valid?
Yes. Jacinto did not provide any justification. Hence, the disallowance is
proper.
Lesson: If the TP did not submit any OR, there must be a justification i.e.
destroyed, etc.
iii. Power to Conduct Inventory Taking, Surveillance, and to issue
Presumptive Gross Sales/Receipts
Presumptive Gross Receipts (PGR)
If a TP failed to keep books of accounts, then the CIR has the power to
issue Presumptive Gross Receipts.
Provided that this PGR must be based on BEOR. Otherwise, any
assessment made pertinent thereto is considered as void.
iv. Termination of Taxable Period
Taxable Periods
(1) Calendar Year - 12-month period beginning January
(2) Fiscal year – 12-month period beginning at any month other than
January. It can only be availed of by Corporate TPs. Individual TPs
are mandated to utilize the CY.
Termination of Taxable Period
The CIR cannot assess in the middle of the taxable year, because the CIR
can only assess at the end of the Taxable year. Otherwise, if the CIR will
assess in the middle of the taxable year, the CIR had technically
terminated the taxable period.
Suppose:
In 2017, CIR assessed in June 2018.
Was there a termination of the taxable period?
There was no termination because the entire taxable period had already
lapse.
However, if the CIR assessed in June 2017. There is already a termination
of taxable period.
When termination is allowed [H.I.R.R.O]
When the CIR is allowed to assess taxes even during the middle of the
taxable period
(a) When the TP hides a property;
(b) When the TP intends to leave the PH;
(c) When the TP removes a property in the PH;
(d) When the TP retires from business; and
(e) When the TP obstructs proceedings for the collection of the tax
v. Fixing of Real Property Values
FMV is the higher value prescribed by the CIR (aka zonal value) or the
value prescribed by the city/provincial assessor (aka assessed value)
Consultation | RA 8424
It is mandatory that there must a consultation with competent appraisers
both from the public and private sector.
Notice | TRAIN law
There is an additional requirement, other than the consultation, there
must be notice served to all affected TPs
Chismis:
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
There are pending cases before the other courts (right now) questioning
the Zonal Valuation released by the CIR, questioned on the ground that
there was no notice to the TP. It is a good defense, because it is already a
requirement under the TRAIN Law.
Lesson from the Chismis | Requirements
Hence, there are currently two (2) requirements in fixing the RP values:
(1) Consultation with competent appraisers both from the public and
private sector; and
(2) Service of Notice to all affected TPs
Mandatory increase of Zonal Valuation
Under the TRAIN LAW, there is an automatic increase every 3 years of
the zonal valuation
CIR v. Aquafresh Seafoods
G.R. No. 170389, 20 October 2010
Consultation from Both Sectors
Aquafresh has a property with a value of ₱3,100,000 classified as
residential land. The BIR claimed that the properties were undervalued.
The BIR conducted ocular inspection, after investigation, they found out
that the property was actually classified as a commercial land.
Aquafresh filed an appeal before the CTA contending that the property is
classified as residential land. CTA ruled in favor of Aquafresh, although
the BIR has the authority to reclassify lands, it must be done with the
consultation or authority of competent appraisals from bothprivate and
public individuals.
Ruling
Under Section 6E, 8424, the CIR has the power to reclassify the lands and
provide zonal valuations, but it must be done with the prior consultation
by the CIR with competent appraisals coming from both private and
public individuals
In this case, the CIR only relied in the investigation of its own special
investigation division. For non-compliance of the rules under the NIRC,
the reevaluation of the land is void.
Remember: The CIR reclassify the zone from residential to commercial,
because it was used for commercial purpose. Zonal Valuation is based,
not on actual use but on the predominant use of properties in the same
zone. Actual use is not being factored in Zonal Valuation; rather actual use
is only important for RP Tax Purposes.
Hence,
Predominant Use – Zonal Valuation
Actual Use – RP Tax purposes
In this case, the property is located in the zone which are predominantly
classified as residential, hence, even if it used for commercial purposes, it
shall still be classified as a residential land.
vi. Accredit Tax Agents
Accreditation does not apply to Lawyers | It applies to bookkeepers
and CPAs
Lawyers are bound by the ROC. Even if without any accreditation as long
as we have our license then we can represent our client.
In fact, under the ROC, such representation may or may not be in writing.
It only applies to bookkeepers and CPA who would sign tax papers and
audit reports to be submitted to the BIR
vii. Power to Prescribe Procedural/Documentary Requirements
(a) E-Filing
E-Filing
Required by the CIR, it is within the power of the CIR
Large TPs are required to file E-Filing and to pay their taxes.
Substituted Filing (Quiz)
(1) TP is a pure compensation income earner
(2) TP has one ER during the taxable year;
(3) The amount of tax had been correctly withheld;
80 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

(4) ER filed an Alpha List (which represents the tax return of the EE)
(5) ER must furnish a certificate of withholding (BIR Form 2316) to the
EE.
(2017 Bar) Suppose:
Darryl is EE of X Corporation from January to March, he resigned
subsequently. After his resignation he had established his own business.
Is he qualified for substituted filing?
No, because he is not considered a purely compensation income earner
during the taxable year. If a TP earned an income from business during
the taxable year, this TP is no longer qualified under substituted filing
What if Darryl is an EE of X corporation from Jan to March and from
April to Dec, he is an EE of Y corporation?
Still no, because he has two ERs during the same taxable year. Under, the
TRAIN law and RR 11-2018, if a purely compensation income earner
who earned compensation income from two ERs whether
simultaneously or successively during the same TY shall be DQ from
substituted filing.
Under RR 11-2018, if a NRA engaged in trade and business earns pure
compensation income, he shall be DQ for substituted filing.
What if this NRA earned compensation income from 1 ER, during
the same taxable year?
Requirements | Instances and Increase in Net Worth
1. Instances stated above; and
2. It must clearly appear that there must be an increase in the net worth.
Victoria Manufacturing Corp v. CIR
CTA (Special First Division) Case No. 8187, 23 June 2013
Net Worth Method
Victoria only reported ₱4,000,000 instead of ₱5,000,000, representing
the inventories acquired in 2006. The inventories in 2005 were not
reflected amounting to ₱1,000,000.
Victoria was able to provide all the book and records that the BIR needs.
Hence, the new worth method is not applied
viii. Power to Delegate
CIR has the power to delegate its functions indicated in the NIRC.
Provided, it is supported by a Revenue Administrative Issuance or Order
(RAI or RAO) i.e., LOA. Without such, the subordinates of the CIR are not
authorized to do such acts.
Is Examination of Books a delegable function of the CIR?
Yes, provided there is a LOA.
(a) Non-Delegable Powers

Still no, because a NRA engaged in trade and business is DQ from The following functions cannot be delegated (RICA):
substituted filing. (1) Power to Recommend the Promulgation of RRs

Note: While Substituted Filing is additional provision in the TRAIN law,
the concept is not new, because the lawmakers had just copied the
provisions under the RR with respect to substituted filing. This is called
legislative approval by reenactment
Condominium Units | Zonal Valuation
Condo units have their own zonal valuation but other buildings do not
have any.
Trivia: Prior 23 June 2018, the zonal valuation for all condo units in
Baguio is pegged at ₱24.000. Thereafter, it was pegged at ₱42.000.
However, it is the same for all condo units in the city, whether in Session
Road or in Loakan. In QC, it depends on the type of condo (i.e., residence
or high-end), and its location.
(b) Net Worth Method
Definition
If there is an increase in the net worth of a TP for a certain period of time,
with due consideration of non-deductible items and the non-taxable
items, it shall be considered as taxable income.
Usual Application | Fraud Cases
Applicable usually in fraud cases
Trivia: Napoles Case – was based on the net worth method because
Napoles did not submit any books of accounts.
Authority to Promulgate RR
SOF (The CIR only has the power to recommend the promulgation
of the RR) (Quasi-Legislative)
Authority to Promulgate Admin Ruling i.e., RMO/CMC/BIR
Ruling
CIR (Quasi-Judicial)
Deputy Commissioner
The Deputy Commissioner does not have the same power as
the CIR. Otherwise, it will be considered as a void
recommendation.
(2) Rulings
a. Issuance Of Rulings of First Impression
‘Ruling of First Impression’ is one that involves a noble issue,
it has not been decided upon by the CIR in the previous
taxable years.
Thus, if there is no precedence, the Ruling can only be issued
by the CIR. However, if there is a precedence, the deputy
commissioner can issue such ruling because the Ruling is no
longer considered as a ruling of first impression
b. Power to Revoke, Reverse or Modify a Ruling
Only vested on the CIR (not the Deputy Commissioner,
otherwise, if the DC revoked the ruling, the ruling is void)

When the case had been filed, Napoles, prior to all the alleged scam, had (3) Power to Compromise and Abate
a negative net worth, however, in a 15-year period, her net worth
increased to ₱10,000,000,000. The DC cannot enter into any compromise agreement with the TP.
Because only the CIR has the power to approve for applications for
Because the presumption is that, a TP will only increase its net worth compromise and applications for abatement.
because he had earned an income, not unless, it can be proved that
someone had given her a gift. However, Napoles did not provide any Note: Compromise and Abatement are different.
document that someone had given her gifts.
(4) Power to Assign or Re-Assign Employees Detailed in
She merely declared ₱2 billion. The difference shall be considered as Establishments subject to Excise Tax
underdeclared income which is subject to DIT or deficiency income tax.
Two Year Period
Section 16, NIRC – these EEs detailed must only be assigned thereat
Instances where Net Worth Method is applied
for a period of not more than 2 years
(1) The TP does not maintain any books or records
(2) The TP’s books and records are not available
(3) The TP’s books and records are inadequate or Republic v. Hizon
(4) The TP withholds its books and records. 13 December 1999
Non-Delegable Powers in relation to Section 16

Absence such, the net worth method is not applicable.

Authority to file a case
81 | KAMM Notes

Hizon argued that the complaint was filed without the authority of the
CIR, and thus a violation of the Tax Code.
Section 221, NIRC, civil and criminal cases with respect to tax issued must
be filed under the name of the Republic and must be implicated by the
provincial/city prosecutor or OSG.
The CIR issued an order (i.e., TAO and RR) authorizing the Regional
Director to file all the pleadings, it is a valid mode of delegating a function.
It does not follow with the 4 instances with respect to the XPN in the
power to delegate. Hence, it is a valid delegation.
Note: RAO is a valid mode of delegating a function, and it is not under the
4 XPNs.
CIR v. Deutsche Knowledge Services
G.R. No. 211072, 07 November 2016
Relation to the Aichi Case: 100-day period and relation to Petron Case.
CIR filed a PFR, assailed the decision arguing that DA 489-03 is an invalid
decision because it was issued by the DC and not the CIR himself.
Ruling
In Section 4, while the power to interpret the rules and the NIRC is within
the exclusive jurisdiction of NIRC, section 7 provides that the CIR may
delegate this power to his subordinates, and the power to interpret is not
one of the powers that is prohibited thereof to delegate.
Ruling of First Impression
It is not an issuance of first impression, because the issue had already
been decided previously by the CIR, the Deputy Commissioner only
interpreted such ruling. Hence, it was not a noble issue.
Revocation of Ruling
Moreover, it did not revoke the rulings, with respect to the guidelines on
how to file a JCFR, while it had already been subjected to other
interpretations in the past, such ruling does not revoke the previous
ruling of the CIR on the matter. Basically, it just ironed out the power.
ix. Enforcement of Police Powers
SEC. 15. Authority of Internal Revenue Officers to Make Arrests and Seizures. - The
Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the
Revenue District Officers and other internal revenue officers shall have authority to
make arrests and seizures for the violation of any penal law, rule or regulation
administered by the Bureau of Internal Revenue. Any person so arrested shall be
forthwith brought before a court, there to be dealt with according to law.
x. Authority to Abate and Compromise Tax Liabilities
(a) Compromise
Grounds
(1) Reasonable doubt as to the validity of the assessment (40%)
Reasonable Doubt | Jeopardy Assessment
Usually when the nature of the assessment is in the nature of a
jeopardy assessment
‘Jeopardy assessment’ – an assessment without complete audit or
with partial audit (usually kapag nagmamadali ang BIR before the
prescription of the right of the Government to assess the tax)
Period to Assess
The Government has the 3-year period to assess.
Hence, in case of jeopardy assessment, the TP can file an application
for compromise on the ground of reasonable doubt as to the
validity of the assessment.
(2) When there is financial inability to pay the tax (10%)
‘Financial Inability’ –TP’s Liability is more than its assets
Requisite
When the TP submits a written waiver of the Bank Secrecy law and
other related laws.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Otherwise, the CIR will not entertain such application unless there
are such submission of documents i.e., written waiver
Limitation
The Compromise must not be less than:
(1) 10% of the tax base – The TP has financial inability to pay the tax
(2) 40% of the tax base – If the ground is reasonable doubt
Approval of the Evaluation Board
(1) If the compromise is less than the % allowed or
(2) If the tax base due is more than ₱1,000,000
(b) Abatement
Grounds
(1) The assessment is unjust or excessive; or
Reasonable Doubt vis-à-vis Unjust or Excessive (No legal
basis)
There is only a doubt on compromise. On the other hand, the TP is
sure that the assessment is without any legal basis.
Hence, an erroneous tax cannot be a subject of compromise; when
there is no legal basis.
(2) The administrative cost of collecting the tax is greater than the
collection of the amount due
Limitation
Unlike in compromise, there is no limitation. The entire amount can be
removed
People v. Tan
G.R. No. 152532, 16 August 2005
An anti-graft and corrupt case was filed before the Sandiganbayan
against CIR, Buenvenido Tan Jr. for the compromise agreement it entered
into with SMC
The BIR pursuant to a LOA and MOA had an investigation for deficiency
taxes on excises taxes on the specific and ad valorem tax amounting to
₱342 million.
SMC questioned the assessment on the ground of:
(1) The specific tax was already paid because of the application of the
ad valorem tax which was already approved by the BIR; and
(2) The computation for the ad valorem tax was erroneous because the
BIR failed to disallow the deduction on the ad valorem tax and other
expenses.
Tan denied the protest but he reduced the amount of 342 million to 302
million. The decrease is by reason of the excess ad valorem tax. The other
top officials of the BIR had the same claim that the decrease was proper.
There was also a settlement between the BIR officials and SMC that the
amount of 302 million shall be reduced to 10 million.
Ruling
Reduction from 342 million to 302 million
The reduction is proper. The application of the excess valorem tax shall
be applied on the specific tax due as credit. This is a proper abatement on
the following reasons:
(1) There was a proper approval by the CIR
(2) The top officials approved the same pursuant to the presumption
of regularity
(3) The reduction of such taxes was pursuant to pertinent laws and RR,
that payment of advance taxes is not prohibited under the law; and
(4) The tax was not yet final and due
302 million to 10 million | Tax Pyramiding
The SC ruled that the reduction is a proper form of abatement even if it
was named ‘compromise’ in the pleadings submitted to the Court.
(1) One of the grounds for a proper abatement is if the assessment is
unjust or excessive. In this case, there was an unjust assessment on
the part of CIR, because under the NIRC, the ad valorem tax cannot
82 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

be the tax base for another tax liability. That is tantamount to tax MetroStar v. Superama Case
pyramiding. The PAN must contain the facts and the law on which the
(2) Another reason for the huge reduction of tax is the deduction of assessment is made.
other expenses. Under EO 22 and 273, excise tax should be paid
before the products are removed from the place of production Period to reply
15-day period to file a reply – without such reply, TP defaults.
However, assessed the SMC for excise tax based on the GSP in which it Hence, the CIR will just issue the FAN without considering any
includes the price in which the SMC and its agents will sell it on their retail defense that may be raised by the TP.
or wholesale price. This is considered as erroneous, because the payment
should be based on the price before it was removed from the place of Authority to issue PAN
reduction. Regional Director or CIR.

Remember: (7) Issuance of FAN by the BIR

1. Compromise Agreement, while denominated as compromise
agreement, is not considered as compromise but rather an (8) Protest by the TP
abatement, if the tax is unjustly or excessively assessed.
2. If it is a proper subject for abatement, the amount of tax can be Period
partially or wholly removed. There is no limitation as to the amount 30 days from the receipt of the formal assessment
to be abated.
3. An erroneous tax is not a proper subject for compromise. In this Protest Kinds
case, the assessment is erroneous because there was no legal basis a. Request for Reconsideration
on the tax assessment. Hence, it cannot be a valid subject of b. Request for Reinvestigation
compromise. Only valid taxes can be a valid subject of compromise.
Lack of Protest
If the TP did not file a protest, the assessment becomes final,
The Rule of Estoppel in Relation to Tax executory, and demandable.
Administration
Consequently, the TP can no longer question the correctness of the
Against the Government computation of the revenue officer.

Further, the TP can no longer raise the defense of prescription with

GR: The rules on estoppel cannot be applied against the Government
respect to the assessment of the tax.
XPN: Provisions regarding remedial measures in order to protect the
rights of the TP.
Remedy
TP can file for a compromise, and he can ‘pray’ that the right
Against the Taxpayer of the government to collect prescribes.

GR: The rules on estoppel can be applied against the TP. Note: These principles regarding assessment. Pertains to the FAN
XPN: In the interest of substantive justice and fair play and not the PAN

Assessments and its Governing Principles Request for Reconsideration v. Request for Reinvestigation
Request for Reconsideration Request for Reinvestigation
Plea for reevaluation of existing Plea for reevaluation of
Process of Assessment
documents additional documents (not
newly discovered evidence)
(1) Issuance of LOA
Shall not toll the period for Shall toll the period for collection
collection of such tax of such tax
CIR v. Liquigas – Absence of LOA, then assessment void
CIR v. Sony – if the LOA contains more than 2 taxable periods, both
Note: PAN is different from FAN. The FAN is the one which shall be
taxable periods must be specified. If the other taxable period is not
protested to. If the TP did not file any protest to the PAN, it will not result
specified, then only the assessment with respect to the specified
to the assessment becoming final and executory, because no assessment
taxable period shall be considered as a valid assessment.
had been issued to speak of. All principles concerning assessment talks
about FAN and not PAN.
(2) BIR will issue its notice of audit findings

(3) The TP questions the assessment What Constitutes and Assessment

(4) Issuance of Notice of Informal Conference (NIC) CIR v. Gonzales

‘NIC’ - invites the TP to discuss the audit findings G.R. No. 177279, 13 October 2010
What constitutes an assessment
Mandatory Requirement
Under RR 18-2013 – This is a mandatory requirement. Hence, if the Ruling
BIR will not issue a NIC, the assessment is void (violation of due Section 255 and 254 are criminal charges, and not mere collection suit.
process)
The protest filed on the PAN was filed belatedly because it was filed
(5) The TP will be given the chance to file a reply or attend the beyond the 15-day period, grantia arguendo it is filed within 15 days, it is
informal conference still without merit.
If the grounds indicated in the reply are unmeritorious, then there
would bet a PAN. Absence of Serial No.
Serial No. is not required on FAN, what is required is that the assessment
(6) The preliminary assessment notice (PAN) is based on law, RR and the other jurisprudence in which the assessment
PAN contains all the deficiency taxes and the details of discrepancy is based and it must be given to the TP in a written form.
which will include the legal and factual basis in which the
assessment is made Examination of Books per year
GR: The examination of books must be conducted only once per year
Mandatory Requirement XPN: The presence of fraud or bad faith.
GR: Mandatory In this case, there is a prima facie case of fraud because the under
XPN: Instances under Section 228 declared income tax deficiency of LMCEC is more than 30% of its actual
Otherwise, FAN is void. tax due.

83 | KAMM Notes

Remember:
Assessment | Definition - ‘Assessment’ is a declaration of deficient taxes
sent to a TP who failed to respond in a PAN or whose response is without
merit
Effect of failure of TP to file within the period
a. PAN - Reply within 15 days
b. FAN - Protest within 30 days
In both, TP failed to file a protest. There is no request for reconsideration
or reinvestigation. Hence, the assessment is final, executory and
demandable.
In effect, the TP can no longer collaterally attack the validity either
through an Appeal or Reconsideration.
Terms | Documents submitted
• Formal Letter of Demand (FLD)
It contains the demand to pay the tax liability. If there is no demand
to pay the tax with the specific date, the assessment shall be
considered as void.
-Fitness by Design (2016)
• Assessment Notice
It contains the summary of the deficiency taxes. If void, the WLD is
likewise void.
• Details of Discrepancy
It contains the specific detailed facts, law, RR and jurisprudence in
which the assessment is based, must be indicated in the assessment
notice.
CIR v. Enron Subic Power Corporation
G.R. No. 166387, 19 January 2009
There was an assessment Notice but allegedly it did not comply with the
requirements with the law i.e., no legal and factual basis.
CIR argued that there was a valid assessment because:
(1) There was an advice that was given to the EE of Enron
(2) It informed Enron through a 5-day preliminary letter; and
(3) Enron was furnished with the copy of audit working document on
the EE, in which the assessment was based.
Is the assessment valid?
Mandatory Requirements
Section 228 – provides that the TP shall be notified through the
Assessment Notice the legal and factual basis
RR 12-99 – A FLD for the deficiency tax the legal and factual basis on
which the deficiency is based. Otherwise, the deficiency is void.
In this case, CIR failed to comply with such provisions.
First, the deficiency assessment was merely filed by the BIR and it merely
indicated the supposed charges.
Second, the revenue officer failed to provide in writing the factual and
legal basis.
Third, the CIR failed to explain to Enron on how was it able to come up
with the assessment
Fourth, the CIR failed to specify the specific provisions under the tax code
that was not complied by Enron
Fifth, the deficiency tax assessment merely itemized the deduction
allowed by the CIR. It failed to provide legal and factual basis.
Hence, there was a violation of due process, because the requirements
under Section 228 and RR 12-99 are mandatory.
Remember: Prior to 8424, it is enough that the TP is notified of the
findings. Under RA 8424, both the legal and factual basis must be put in
writing and must be indicated the assessment.
In this case, when the BIR issued the FAN, Enron was already supplied
with the audit working papers and 5-day preliminary letter. However,
the mistake of CIR is that, in the AN issued by the CIR, it merely made a
computation of the tax liability without the legal and factual basis.
Samelco v. CIR
G.R. No. 193100, 10 December 2014
Ruling
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
It sufficiently apprised SAMLECO of the factual and legal basis. While it is
true that the FAN did not state specifically the factual and legal basis of
the assessment, there are three manifestations that SAMELCO was
already apprised:
(1) SAMELCO was furnished of the copy of the revenue officers’ report,
which include the legal and factual basis
(2) There were exchange of letters and correspondence; and
(3) The final letter of the CIR fully explained the legal and actual basis
Hence, there was no violation of due process.
Remember (Bar)
(1) Evaluate WON the factual circumstances is similar to the factual
milieu of Enron; if similar, then you need to decide if the assessment
is void because of the failure to indicate the facts, law, RR and the
jurisprudence in which the assessment is based.
(2) If the Factual Circumstance is similar to the factual milieu in
Samelco – decide with the doctrine in Samelco
Enron vis-à-vis SAMELCO | Correspondence
Enron –TP did not reply on the correspondence
Samelco – TP fully participated in the proceedings with the CIR; there was
a series of correspondence
CIR v. Pascor
29 June 1999
Affidavit vis-à-vis Assessment
Remember: The document being considered as an assessment is not the
criminal complaint but the affidavit of the revenue officer attached to the
criminal complaint. The affidavit was allegedly considered as an
assessment by the CIR.
Shall the affidavit executed by the revenue officer in order to
support a criminal complaint for tax evasion be considered as
assessment?
It is not considered as an assessment because for it to be considered as
an assessment:
(1) It must be sent to and received by the TP - In this case, it was
received by the DOJ
(2) It must be addressed to the TP - It was addressed to the Secretary
of Justice
(3) There must be a demand to pay - In this case, there was no demand
to pay, it was merely an affidavit in order to support the criminal
complaint against the TP. Hence, it cannot be considered as an
assessment, it was void.
Other principles to be considered:
(4) It must contain the factual and legal basis in which the assessment
has been based (Samelco; Enron)
(5) It must have been preceded by a LOA
(6) It should have been preceded by a NIC
(7) There should be a PAN (XPN: Section 228)
(8) It must be issued within the prescriptive period
(9) There must be a definite amount of tax due
(10) There must be a definite due date indicated in the FAN
Suppose:
In June 2015, the client of Atty. Tin visited her for a legal advice. There
were LOA, Audit Findings, NIC, and PAN (received on Jan 10 2014), but
there was no FAN. The assessment was on T.Y. 2010.
Under the law, the government has a period of 3 years to collect from the
last day prescribed by law for the filing of the return, or date of actual
filing, if the return has been filed after the last day prescribed by law.
Last date prescribed by law
For T.Y. 2010, filing of the return should be filed on or before 15 April
2011. Hence, the Government can validly assess until 15 April 2014.
The FAN should be issued within the 15 April 2014.
Later, it was found out that the FAN was given on 25 February 2014. The
document was titled ‘FLD’ and attached thereto an Assessment Notice.
However, it was received by the bookkeeper of the TP, and not the TP
herself. The bookkeeper received it in La Union, and not in Baguio.
84 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Was there a valid assessment? (1) Because there is no definite amount of tax liability

No, since it was not a valid substituted service. For it to be a valid
substituted service, it should have been served to the principal office of
the TP. In this case, the bookkeeper is not an agent of the TP with respect
to the act of receiving assessment notices, because it should have been
done through the EE of the TP. The bookkeeper is not the EE of the TP.
Lesson: CIR v. PASCOR, in order for the assessment to be valid, it must be
sent to and received by the TP. In cases of substituted service i.e.,
bookkeeper, it must be evidenced that the bookkeeper has the authority
to receive such assessment notice.
CIR v. Reyes
G.R. No. 159694, 27 January 2006
Section 228, NIRC –The TP must be notified with the factual and legal
basis of the assessment, otherwise, the assessment shall be void.
If there is no definite tax liability, the assessment is void
The tax due is still subject to modification, because it was noted that it can
be adjusted. Hence, the assessment is void.
(2) There must be a definite due date
In this case, there was no due date indicated in the FAN within which the
TP has to pay the tax.
If there is no due date, it negates the demand for payment.
According to CIR, the 15 April 2004 date is the due date. However,
according to the SC, it will not be considered as a due date it will be
considered as a date within the recomputation or the modification shall
be made in terms of the tax due

RR 6-2000 & RMO 4-2000 provides for delinquent TP to compromise Note: Since the FAN is void, the warrant of levy or distraint is also void.
their Tax Liabilities. Because the WDL must be preceded by a valid assessment.

CTA rules on the compromise and assessment. Process of Assessment (Fitness by Design)

RA 8424, the TP must be apprised of both the legal and factual basis in (1) It starts with the filing of the Tax Return and the payment of the Tax.
writing on the liability through an assessment. In this case, the This is called self-assessment (initial assessment), because the tax
assessment was deemed void because it was just a mere notice. Hence, indicated was assessed by the TP himself.
no compromise can be held on a void assessment. (2) Next, the CIR may allow any TP for the examination of the proper
tax liability
Ruling (3) If the TP’s books of accounts shall be examined, there must be a
Although it is ideal that the executive department should have issued the LOA.
IRR as soon as the RA 8424 was enacted, the existence of the IRR is (4) There must be an issuance of audit findings.
immaterial. What is material is that RA 8424is already in effect and (5) NIC is required.
substantive law would state that it is important that the TP is apprised of (6) The TP shall be given 15 days to file a reply on the NIC.
both the legal and factual basis of its tax liability in order to refute such (7) Endorsement to the Assessment Division. If no response, or if the
liability in cases of erroneous tax assessment, etc. response it not meritorious.
(8) The Assessment Division will issue a PAN, which must contain the
legal and factual basis in which the assessment has been based.
Remember:
(9) TP given 15 days to file a reply. Otherwise, TP defaults
(1) The legal and factual basis must be contained in the assessment
(10) If the ground in the reply is unmeritorious or absence of any reply,
notice. It is not sufficient that the TP is informed of the factual and
the assessment division issue FAN.
legal basis. It is necessary that both is put in writing in the AN
(11) FAN
• Note: Substantial compliance in SAMELCO case
(2) No compromise can be had on an erroneous assessment (People v.
Note: LOA, NIC and PAN – Comply with Due Process Clause
Tan)
(3) No compromise can be had on void assessments (CIR v. Reyes)
(4) GR: Laws are prospective in nature Statute of Limitation on Assessment of Internal
XPN: Revenue Taxes
a. When the law itself provides for retroactive in nature; and
b. When the law is remedial in nature, because there is no i. Prescriptive Period to Assess and Collect
vested right
3-3 10-5 Rule
CIR v. Fitness by Design
G.R. No. 215957, 09 November 2016 (1) Ordinary Period (3-3) | Section 203
(Bar) Two (2) Additional Requisites for Assessment a. Period for Assessment: 3 years from the last day prescribed
Landmark Case & Additional Grounds for Nullification of Assessment by law for the filing of the return or if the return was filed
beyond last day prescribed by law, it shall be counted from
Annual ITR was filed on 11 April 1996 for the T.Y. 1995. The year 1995 is the date of actual filing.
considered as the pre-operating stage of Fitness, which was considered b. Period for Collection: If there is assessment within the 3-year
as actual operations. TP are required to file an Annual ITR despite that period, the government has a period of 3 years to collect from
1995 was the pre-operating stage the date of assessment. ‘Date of assessment’ means the date
when it was released to, sent to or issued to the TP (not the
A FAN was received by Fitness on 09 June 2004. The FAN was TP’s receipt)
issued/dated (not receipt) 17 March 2004. The FAN was issued under a (2) Extra-Ordinary Period (10-5) | Section 222
LOA but the FAN, while it contains the tax and details of discrepancy, the Filing of false or fraudulent return with the intent to evade the tax
FAN stated that: or the omission to file a return
a. Period for Assessment: 10 years from the date of discovery of
“Please note, however, that the interest and total amount due will have to be adjusted if either the filing or the omission.
paid prior or beyond 15 April 2004”.
b. Period for Collection: The government must collect within 5
years from the date of assessment
xxx

“you are requested to pay the amount due…” Act of fraud must be indicated
In order for the 10-year period shall be applicable, the act of fraud
There was a protest on the FAN, instead of acting on the protest, the CIR must be specifically indicated in the AN.
issued a warrant of distraint or levy
ii. Ordinary Period
Ruling
Administrative Collection Judicial Collection
The FAN is not a valid assessment

85 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Assessment is necessary in Filing of a case in court, either: Suppose:

administrative remedy of a. Civil (collection of the tax); or Korean School, client of Ma’am Tin. Filing of ITR was 2011. 2.8M FAN
collecting the Tax b. Criminal case issued February 28 2014. Defense, there was no legal and actual basis.
There was a protest. Instead of issuing a formal decision on disputed
The issuance of Warrant of Note: If the amount of tax assessment, BIR sent a letter to get a confirmatory ruling. In 2016, there
Distraint and Levy must always exceeds 1M the crim case must was a collection letter. Pray that the WDL will be issued beyond February
be preceded by a valid directly file before the CTA (CTA 28 2017. In this case, the WDL was issued in 2018. The remedy is to file a
Assessment Notice (AN). has original jurisdiction in cases petition to nullify the WDL on the ground of prescription.
Otherwise, if the WDL is void, the where the tax amounts to more
DL is also void than 1M; Judy Ann claim case) Lesson: “Sometimes, being diligent might be prejudicial. So, let’s not be
diligent”
Assessment -Ma’am Tin, 2019

Due Process iii. Extra Ordinary Period

The reason why NOA, PAN and LOA are necessary
NOA is not a condition precedent in filing a civil/crim case
A Criminal Case or Civil Case can be filed without assessment notice.
Hence, Assessment is not necessary to file a case in court
Extraordinary Period | 10-5 Rule
Section 222 speaks of Extraordinary Period to Assess – 10 years. 10 years
from the date of discovery of the filing of the false or fraudulent return or
from the discovery of the omission to file the return.

Period to Assess When applicable?

The government has a period of three (3) years to assess reckoned from: (1) When there is filing of a false or fraudulent return but has the intent
a. the date prescribed by law for the filing of the return, or to evade the tax; or
b. the actual date of filing if the return has been filed beyond the last (2) Omission to file the return
day prescribed by law for the filing of the return
Act of Fraud must be specifically indicated in the AN
VAT | T.Y. 2017 CIR v. Fitness, the 10-year period is not applicable because there was no
Last day for the mention in the NOA of any act of fraud on the part of the TP.
The Gov’t can assess
filing If filed on:
until:
prescribed by law
Hence, For the 10-year period to be applicable, the act of fraud committed
1Q April 25 2017 April 20 2017 April 25 2020
by the TP must be specifically indicated in the NOA. Otherwise, the 3-year
2Q July 25 2017 July 30 2017 July 30 2020
period shall be applicable
3Q October 25 2017 October 1 2017 October 25 2020
January 25 Practice: Usually, the surcharge is 25%. If there is intent to evade the tax,
4Q January 25 2018 January 25 2021
2018 the surcharge is 50%. Thus, if they will apply the 10-year period, the
surcharge must be 50%. Once 25% is used, it is an admission on the part
Income Tax | T.Y. 2017 of the BIR that there is no fraud. Otherwise, if there’s fraud, they should
Last day for the filing have used the 50% surcharge.
If filed on: The Gov’t can assess until:
prescribed by law
1Q Immaterial
Period to collect | 5 years
2Q Immaterial
The assessment issued within 10 years; the government can collect
3Q Immaterial within 5 years from the date of assessment.
4Q April 15 2018 April 1 2018 April 15 2021
There can be proceeding in court without the assessment but it shall be
Note: In income tax, all the quarterly returns shall be considered as filed within the same period i.e., date of discover
provisional in nature. While in VAT, all the monthly returns shall be
considered as provisional in nature.
CIR v. GJM
Extra-Ordinary Period to Assess
Primetown v. CIR
Ruling
NCC is repealed by Admin Code of the PH – 1 year is 12 calendar months. In GJM, it must be established that the TP committed an act in fraud. If the
Consequently, you do not consider any leap year. TP can justify the non-declaration of a particular income (especially if it
has been declared during the succeeding year), then there is no fraud to
Collection speak of.

When collected? In this case, the account was not declared in 2010 but was declared in
(1) Collection without assessment –within the same period to assess 2011. There is no fraud to speak of, because the declaration of the income
(2) Collection with assessment – 3 years from the date of assessment was only delayed
to collect
Hence, the 10-year period will not apply, rather the 3-year period shall
‘Date of assessment’ – the assessment sent to, issued to, or released to apply.
the TP (and not receipt by TP) -BPI, PASCOR and HIZON Cases
CIR v. STI
Trivia: Most reviewers (usually in Manila) will tell you that the period to Extra-Ordinary Period to Assess
collect is 5 years, because they claim that the 3-year period has no legal
basis, and the 5-year period has jurisprudence, however, the STI executed a waiver but was declared invalid because of the infirmities
jurisprudence cited was promulgated before the effectivity of RA 8424 provided under RMO 20-90.
and BP 700.
Hence, we will consider if the FLD has been issued within the 3-year
In fact, the 3-year period already has a jurisprudence to bank on i.e. period provided under Section 203.
United Salvage
FLD issued 16 June 2007
CIR v. United Salvage Towage
02 July 2014 There are three taxes provided in this case:

Section 318 of BP 700 vis-à-vis Section 203 of 8424, both laws have the Income Tax
same provision; that the government has 3 years to assess and 3 years T.Y. 2003, TP filed the ITR on 15 August 2003 (because it adopts Fiscal
from the date of assessment to collect year). Assuming the last day of filing for the TP is on the said date, the
presumption is the TP’s first day of its fiscal year is on April 1.

86 | KAMM Notes

The AN was issued on 16 June 2007. It should have been issued on August
15, 2006. Hence, barred by prescription.
VAT – Last day of assessment
Actual filing – Last day prescribed by law – Last day of assessment
July 23 02 – July 25 02 – July 25 05
Oct 25 02 – Oct 25 02 – Oct 25 05
Jan 24 03 – Jan 25 02 – Jan 25 05
May 23 03 – April 25 03 – May 23 06
Expanded Withholding Tax
May 10 02 – April 15 03 (last day of payment)
Ruling
Income Tax
The government has until August 15 2006 to assess.
VAT
With respect to VAT, SC only mentioned one date, May 23 2006 (The
class’ answer was May 25 2006). Why? If a prescriptive period and the
last day is a holiday, the act must be done before the day because it is not
a reglementary period, rather it is a prescriptive period.
Withholding Taxes
Must be paid within 10 days after the close of the month. If the TP is
registered under Electronic Filing and Payment System (EFPS), the tax
can be paid within 15 days after the close of the month.
In this case, the government has until April 17 2006 to assess the tax.
BAR purposes:
Stick with this rule - The government has the right to assess the tax
liability within 3 years form the date prescribed by law for the filing of the
return or if filed beyond the last day prescribed by law, the 3 year shall be
counted from the actual date of filing
Waiver of the Statue of Limitations
Extendible Period
The period to assess and collect can be extended provided that the TP will
execute a valid waiver of the statute of limitations.
• The waiver must be executed before the lapse of the regular period
to assess or collect; and
• The waiver must indicate the extended period
Requisites | Valid Waiver
The form may not be necessarily be in the form prescribed by RMO 20-
90. However, the ff shall be complied with:
(1) Waiver shall be executed before the expiration of the period to
assess and collect
Therefore, the date of execution shall be specifically indicated in the
waiver
(2) The waiver must be signed by the TP and his representative
In case of corporate TP, it must be signed by its responsible officials
‘Responsible officials’ – those who participated during the audit
conducted by the BIR
(3) SPA is no longer necessary
Prior RMO 14-2016, such waiver is void if the person signing is not
the TP and the person allegedly authorized was not armed by a
SPA.
Under RMO 14-2016, a SPA is no longer necessary. The TP is
charged with the burden in ensuring that the waiver is executed by
an authorized representative
(4) The expiry date of the period agreed upon after the 3-year period
should be indicated
Because an unlimited waiver is considered as a void waiver.
Under RMO 14-2016, if the waiver pertains to the waiver of the
period to collect, then the tax being collected must be specified, but
if it pertains to the period to assess, there is no need to specify the
period tax to be assessed
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
(5) It is the duty of the TP to submit the waiver to the CIR or any
revenue officer
This CIR/officer must indicate the acceptance by signing the waiver
(6) The waiver must be executed and accepted before the expiration of
the regular 3-year period
(7) The TP has the duty to retain a copy; and
Note: Material dates: (1) Date of execution, and (2) Expiry Date
Principles to Remember
a. Both dates must be indicated in the waiver. Otherwise, the waiver
is void
b. While it is true that the waiver must be accepted before the 3-year
period, date of acceptance must not be necessarily indicated in the
waiver. As long as it is accepted prior to the 3-year period
c. Date of execution, pertains to the act of the TP.
d. Date of acceptance is the act of the CIR
e. Prior to RMO 14–2016 one of the requisites for a valid waiver is that
the fact of receipt must be indicated in original copy kept by the BIR.
Under RMO 14-2016, this requisite was removed. Hence, the copy
must be given by the TP and it shall be kept by the TP as well.
Note: If one of the requisites for its validity is wanting, the waiver is void.
Suppose:
28 February 2014 Story – Issued FAN for T.Y 2009. The ITR should be
filed on 15 April 2010. The Assessment must be filed before or on 15 April
2013. Hence, if the AN was issued on 15 April 2014, then the assessment
is void.
If BIR does not have enough time to issue an assessment, the BIR usually
makes the TP sign for a waiver. The waiver must be executed within the
period of 15 April 2010 and 15 April 2013. The waiver must indicate the
expiry date.
As a counsel for the TP, you need to attack the validity of the waiver if it is
wanting for any requisites provided under RMO 14-2016.
PH Journalist, Inc. v. CIR
G.R. No. 162852, 16 December 2004
RMO 140-2016 (Bar)
(1) If there is no expiration date, call it unlimited waiver - It is
considered as infirmity, because expiration date is a material date.
(2) The waiver does indicate the date of acceptance - It is not
considered as infirmity, because absence of the indication of the
date of acceptance is not a ground to nullify the waiver
(3) The waiver does not indicate the fact of receipt on the original copy
of the waiver - Not an infirmity, because it is already the duty of the
TP to provide a copy to the CIR
CIR v. Kudos Metal Corporation
G.R. No. 178087, 5 May 2010
(Bar)
Infirmities
(1) Kudos signed the waiver, but he was not armed with a written
authority to sign the same.
(2) There was no date of acceptance indicated on the waiver
(3) The fact of receipt was not indicated in the waiver
Will the waiver be considered as void (under RMO 14-2016)?
(1) Not notarized – not an infirmity.
• Because if the EE who had signed the waiver is a responsible official
who had participated during the audit of the BIR, then he is
considered as authorized to do so.
(2) There was no date of acceptance –Not an infirmity
(3) The fact of receipt was not indicated in the waiver –Not infirmity
Hence, the waiver is considered as valid.
CIR v. CA and Cornation
G.R. No. 115712, 25 February 1999, 303 SCRA 614
87 | KAMM Notes

BIR failed to sign the waiver
Arguments raised by the BIR:
(1) When it accepted the waiver, it already gave its implied consent;
(2) Signatures are mere formality. Hence, the signatures of the RDO is
not necessary; and
(3) The waiver is not considered a bilateral contract but rather a
unilateral act on the part TP
Ruling
A waiver is a contract between the Government and TP, hence, both
signatures of the CIR and TP must be indicated in the waiver. Failure on
the part of the CIR to indicate its acceptance on the waiver will result to
the nullification of the waiver
Kudos Case vis-à-vis Doctrine of Estoppel
As a rule, the doctrine can be applied on TP, and the doctrine cannot be
applied on the Government However, in this case the doctrine cannot be
applied with respect to execution of waivers because there is a detailed
procedure for the proper execution of waivers. Hence, this detailed
procedure must be complied with by the TP and the government.
Otherwise, the waiver is void.
RCBC v. CIR
Estoppel
• August 15 1996: RCBC received a LOA.
• Jan 23 1997: RCBC executed 2 waivers of the statute of limitation,
extending the period to assess until Dec 31 2000
• After examination of the books, on Jan 27 2000: RCBC received a
FLD together with an AN
• December 24 2000, RCBC filed a protest (The protest filed within a
period of 30 days from the receipt of the letter demand)
• November 20 2000: RCBC filed this petition
• In December 6 2000: RCBC received another FLD with AN. This
time, the 2nd letter already contains a reduced amount of liability
• When RCBC had seen the letter with the reduced amount, it paid
the same (not under protest)
• RCBC argues in the CTA, that the waivers it had executed on Jan 23
1997 are considered invalid waivers because it failed to indicate the
date of acceptance, and it did not indicate the fact of receipt
(infirmities). It concluded that the waivers are invalid waivers and
since it is considered as invalid waivers, then the FLD issued after
the lapse of the regular 3-year period is considered as void because
it has not yet issued within the 3-year period provided under
Section 203. In addition, the waiver did not toll the running of the
3-yearperiod
Ruling
Estoppel is clearly applicable because RCBC, through its payment of the
revised assessment which was issued within the extended period,
impliedly admitted the validity of the waivers. If RCBC truly believe that
the waivers were invalid, it should not have paid the tax or at least it
should have paid under protest.
CIR v. Standard Charter
• July 13 2004: FLD with AN was received
• August 2 2004: a protest was filed
• March 9 2005: the TP filed a petition before the CTA due to the
inaction of the CIR on the protest
• Oct 14 2005: Standard Charter filed a motion for leave of court to
serve the supplemental petition because it paid the taxes partially.
It its motion, it mentioned that it was still questioning the validity of
the assessment, nevertheless it paid under protest
RCBC vis-à-vis Standard Charter
Similarity: There was payment, made after the issuance of the FLD
Difference: When RCBC paid the tax, RCBC did not pay it under protest,
when Standard Charter paid the tax, it paid under protest.
Ruling
Estoppel is not applied.
Estoppel by reason of payment as an argument is bereft of merit, because
the TP continued to raise the defense that the waiver is invalid and
therefore the AN is void for having been issued beyond the prescriptive
period.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
When BIR accepted the payment without any objection, it extinguishes
the liability of the TP.
When there is a case filed before the court and the TP paid it under
protest, the acceptance of the BIR of such payment without any objection
of qualification, it extinguishes the tax liability of the TP
Suspension of the Prescriptive Period (S223)
(1) When the CIR is prohibited from making an assessment; or
beginning distraint or levy and 60 days thereafter
When the government issued a WDL, the period to collect shall be
tolled at the time of issuance and thereafter
(2) When the TP requests for reinvestigation which is granted by
the CIR
Two types of Protest
a. Request for reconsideration - Plea for re-evaluation of
existing docs submitted by the TP
b. Request for reinvestigation - Plea of re-evaluation based on
additional docs to be submitted by the TP
Note: The additional document is not necessarily newly discovered
evidence, this is not remedial law.
Difference | Suspension of the running of the period to collect
a. Request for reconsideration - will not suspend the running
of the period to collect.
b. Request for reinvestigation - will suspend the running,
provided the request was granted by the CIR.
Elements | Reinvestigation
a. Filing for request for reinvestigation; and
b. Grant of such request - because if it is not granted by the
CIR, the period to collect will not tolled
(3) When the TP cannot be located in the address given by him
upon which the tax is being assessed
GR: Issuance of an assessment then TP changed location will
suspend the running of the period to collect
XPN: The TP informs the CIR of such change, then the period is not
suspended
It will create an injustice, if there is already AN, the TP changed
location and the government will only have 3 years to collect, if the
TP cannot be located, then its fair that the period to collect shall be
tolled.
(4) If a warrant is duly served to TP or his representative and no
property could be located
Elements
a. Warrant of levy should be served to the TP
b. No property can be located
(5) When the TP is out of the PH
Republic v. Hizon
13 December 1999
July 18 86: Notice of Assessment has been issued
Jan 12 89: WDL was served upon the TP
Nov 03 92: Protest i.e., request for reconsideration was filed by the TP
CIR did not act on the protest until August 11 1994 – The time when the
CIR denied the protest of the TP. CIR filed a case on Jan 1 1997, after
denial.
Two remedies of the government to collect: Admin and Judicial
Admin– BIR shall issue a WDL.
Note: Distraint proceedings shall not be considered as having validly
begone not unless the WDL has been issued to and served upon the TP.
It will only toll if the WDL has been finally served upon the TP.
Judicial – Filing
Is the right of the government barred by prescription?
88 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

No, because the TP failed to file a protest (i.e., request for recon) within
30 days from the receipt of the AN, the AN shall be considered as final,
executory and demandable. Hence, the TP can no longer raise
prescription on the assessment on the tax and the accuracy of the tax
computation.
Therefore, he can only raise the prescription on the collection and not on
assessment (CIR v. Gonzales)
Ruling
The enforcement of the warrant can even go beyond the regular 3-year
period. What is important is to issue and serve the warrant within the 3-
year period, the sale and collection of the property can go beyond the 3-
year period.
Remember: The distraint proceedings shall not be considered as having
been validly begone not unless the WDL is issued and served upon the
TP.
BPI v. CIR
G.R. No. 139736, 17 October 2005
a. Mathematical Error on the computation of tax liability which
appears on the face of the return
b. When the TP applied for excess payment, and the same has
been Carried over by the TP on the next taxable years;
c. Discrepancy between the amount of tax withheld and the tax
remitted;
d. Excise tax on excisable articles has not been paid;
e. When goods exempt from taxes has been Transferred or sold
by an exempt entity to a non-exempt entity
8. Reply – filed within a 15-day period
Absence of reply, the TP will be declared in default, then the
government can issue FAN.
If the ground in the reply is meritorious, the government will issue
FAN.
9. FAN
FAN is also called NOA (CIR v. Gonzales)
Under RR, FAN is also called FLD with AN.

The records do not show the date when the assessment has been mailed Assessment Notice void:
to, released to, etc. to the TP. Rather, the record indicates the date when • If the AN does not contain a demand to pay - (Fitness by
the TP received the AN. Design)
• If the AN does not contain a definite amount of tax liability
SC: Absence of record, the date of receipt shall be considered as the date (Fitness by Design)
of the assessment. • If the AN does not contain a due date (Fitness by Design)

Ruling Details of Discrepancy (DOD)

GR: The 3-year period counted form the date when the AN released to, Explanation on Gonzales, the facts, law jurisprudence, and the RR
issued to, sent to the TP must be indicated in the AN.
XPN: Absence of showing when the assessment has been released to the
TP, the 3 year shall be reckoned from the date of receipt by the TP. Moreover, DOD is part and parcel of AN
10. Protest – filed by TP within 30 days
Facts:
October 20 89: Receiver AN Kinds of Protest
October 15 92: WDL issued to the TP a. Reconsideration
October 23 92: WDL served to the TP b. Reinvestigation

When is the last day for the gov’t to collect?

11. GR: TP 60 days to submit relevant documents
Use the date of receipt, because the records do not show the date of XPN: If the TP had already submitted the relevant docs, together
issuance of the AN with the protest, then the 60-day period will not apply.

Hence, October 19 1992 (because of the Leap Year, Primetown (2004) After the submission two situations may occur, CIR has 180 days
was not yet promulgated) to act on the protest:
180 days | 180 days | Action
The right to collect is barred by prescription because distraint Inaction RD will act on the protest
proceedings cannot be validly issued and served to the TP. Both days RD will not act
must fall within the 3- year prescriptive period to collect. on the protest It shall be called the Final Decision on Disputed
Assessment (FDDA)
Summary; Process of Assessment Appeal to the
CTA Division Under RR 18-2013 the FDDA must contain the
Process of Assessment | Fitness by Design (2016) within 30 days facts, law, jurisprudence, RR etc. Otherwise, the
1. Self-Assessment – the TP assessed his or her own tax liability; (Rule 42, ROC) FDDA is void. As if no decision has been made.
2. LOA – absence thereof, void FAN (Liquigaz and Sony) However, it does not affect the validity of the
FAN.
3. Audit/Examination of Books – Revenue officers will examine
the books of accounts of the TP (or individuals transacting with
Void FDDA is not equal to Void FAN
the TP), then the BIR will issue its audit findings.
Two remedies of the TP if the FDDA has been
Under the RR, notice of audit findings is not necessary. What is issued, within 30 days from the receipt of the
necessary is the issuance of NIC. FDDA:
4. Audit Findings a. Administrative Appeal – b. Judicial
Filing for the request for Appeal – Filing
5. NIC - Absence NIC, FAN is void infringement of due process
reconsideration before the of a PFR before
6. 15 days to respond (Samar)
CIR. Filed within a period of the CTA
If the TP did not file any response, or the grounds are
30 days from the receipt of Division, filed
unmeritorious, the case shall be endorsed to the assessment
the FDDA within 30 days
division
CIR has 180 CIR has pursuant to
7. PAN – which must be signed by the Regional Director
days to act 180 days Rule 42, ROC.
to not act
This PAN must contain the acts the law the jurisprudence in which
CIR will issue a (Lascona
the assessment has been based, without such, the PAN is void.
decision, if the Case)
Absence PAN, FAN is void. Issuance of PAN is mandatory
TP is
requirement due process (MetroStar Case)
aggrieved Appeal to
then TP can the CTA
GR: PAN is mandatory
elevate before Division
XPN: Section 228 | ECDET (Bar)
within 30

89 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

the CTA days (Rule CIR v. Metrostar Superama

Division 42, ROC) G.R. No. 185371, 08 December 2010

Appeal to the
CTA Division
within 30 days
(Rule 42, ROC)
What if the CIR acted on the Protest?
It is not considered as an Admin Appeal, because Admin Appeal will
only come into play if the FDDA has been issued by a Regional
Director.
Admin appeal does not apply to inaction. Admin Appeal will only be
applicable when there is a FDDA issued by the Regional Director or
subordinate of the CIR. (Lascona v. CIR). In case of inaction, appeal it
to the CTA Division.
After the appeal to the CTA Division, the TP can file a MR/MNT before
the same division within 15 days.
In this case of COC v. Marina Sales, G.R. No. 183868, 22 November
2010, the failure of the TP to file a MR/MNT will result to the dismissal
of the petition filed before the CTA En Banc. Hence, the filing of the
MR/MNT is considered as jurisdictional.
File before the CTA En Banc within 15 days in accordance with Rule
43, ROC.
File before the SC in accordance with Rule 45, ROC within 15 days
Under CIR v. Menguito (17 September 2008) - Prior 8424, issuance of
PAN is not mandatory. It was already repealed by CIR v. MetroStar
Superama (Effect of Failure to serve the PAN).
Ungab v. Cusi
30 May 1980
An assessment is not necessary before a TP could be prosecuted for
violation of the NIRC. An AN is not considered as a prerequisite for the
filing of a criminal case for tax evasion
The only important factor in filing for a criminal prosecution is the fact
the TP had willfully evaded the obligation of his tax liability
TAX REMEDIES PROPER
Remedies of Taxpayers before Payment
Tax remedies before payment
1. Protest
2. Compromise

(Bar) | Instances when the NOA is Final and Executory: a. Protest

(1) No protest the NOA is Final, Executory and Demandable.
(2) If the TP did not submit relevant documents, then the NOA is final i. Requisites of a Valid Protest
(3) If the TP did not file any PFR or Admin Appeal, the NOA is Final.
(4) If the TP did not file any MR or MNT, the NOA is Final. Two types of Protest:
(1) Reconsideration and
Lascona v. CIR (2) Reinvestigation.
05 March 2012
Requirements
With respect to disputed assessments, TP has two options: Compliance with RR 12-85 (Read)
(1) File a judicial appeal or PFR before the CTA within 30 days after the
lapse of the 180-day period; or Trivia under RR 12-85
(2) Wait for the decision of the CIR (forever) and to file an appeal If the TP admits a certain amount of liability, the TP must first pay the tax
within 30 days from such receipt of the decision and attach the document evidencing the tax protest. Otherwise, the
protest is not valid.
Inaction of the CIR on the Admin Appeal, the TP has the same options:
(1) file a judicial appeal before the CTA within 30 days after the lapse The protest must also indicate if the protest is recon or rein.
of the 180-day period; or
(2) Wait for the decision of the CIR (forever)and file an appeal within ii. Kinds of Protest
30 days from the such receipt of the decision
CIR v. PH Global Communications
Fishwealth Canning Corporation v. CIR G.R. No. 167146, 31 October 2006
G.R. No. 179343, 21 January 2010 WON the protest in the nature of Recon or Rein

Not MR filed before the CTA division, rather MR before the CIR. Why differentiate?

FAN issued by the CIR. Protested by TP. CIR issued FDDA, on October 1
2018. The FDDA was received by TP on Oct 10 2018. Instead of filing a
PFT before the CTA Division, the TP filed a MR on October 30 2018. CIR
acted on the MR on November 8 2018. The decision was received on Nov
10 2018. On December 1 2018, the TP field a PFR before the CTA
Will the PFR be dismissed?
Yes. The filing of MR before the CIR is not a mandatory procedure. Hence
if the TP opts to file a MR before the CIR, the filing of MR will not toll the
30-day period for which the TP must file a PFT. Because the 30-day
period must be counted from the date of receipt of the FDDA.
Only Rein shall toll the running of the prescriptive period if granted by
the CIR
Ruling
PB COM filed a request for Recon, because PB Comm did not submit
additional documents after the filing of the protest. Hence, the protest
filed by PB COM is for Recon. Nevertheless, even if we consider is as a case
for Rein, it will not toll the running of the prescriptive period because the
request was not granted by the CIR (Grant is one of the requisites to have
a valid protest)
Estate of Late Diaz

In this case, when he filed the MR, he should have filed a PFR before the
CTA even without the decision on the MR, because (1) the MR will not toll
the 30-day period (not a mandatory procedure), and (2) with respect to
the 30-day period to file a PFR, the 30-day period must be reckoned from
the date of receipt of the FDDA.
CIR v. United Salvage and Towage
2 July 2014
Under BP 700, the 5-year prescriptive period was shortened to 3 years.
April 1979, Juliana Diaz died. For the TY 1978, PhilTrust filed for its tax
return on her behalf. BIR assessed Diaz for TY 1978 and the NOA was
served upon PhilTrust, PhilTrust did not act on it. CIR issued a WDL and
served it on the heirs of Diaz.
Ruling
The NOA is void and therefore the WDL is likewise void. A void
assessment bears no fruit. The NOA is void because it has been served
upon a disinterested party.
As a rule, the NOA must be served on the TP. Otherwise, the NOA shall be
void

90 | KAMM Notes

In this case, the NOA was served upon PhilTrust, who is a disinterested
party.
BIR argues that PhilTrust is an agent of Diaz. However, under the NCC,
death extinguished the contract of agency. Hence, upon the death of
Juliana Diaz, the agency between parties extinguished. Thus, when the
NOA was served upon PhilTrust, it was no longer the agent of Diaz
iii. What should be protested?
Remedy
PAN – Reply
FAN – Protest
Allied Banking Corporation v. CIR
5 February 2010
In this case, PAN issued > TP file protest > CIR issued FLD > TP filed a PFR
before the CTA.
What is missing?
There is no protest after FLD and there is no FDDA.
Under RA 1125, as amended RA 9282, the CTA will only acquire
jurisdiction over decisions of CIR on disputed assessment. If there is no
decision to speak of, the CTA cannot acquire jurisdiction.
In this case, there was no decision
Should the PFR be dismissed?
Yes, supposedly yes. In this case, no.
Ruling (BAR):
What has to be protested to, is the FAN and not the PAN. FAN is Protest.
PAN is Reply. In this case, the TP filed a protest against the PAN.
However, the FLD with AN contains this statement “…we will give you the
last opportunity to pay the tax, otherwise you can appeal”
Is the statement binding?
Yes, the PFR before the CTA should not be dismissed because the tenure
or language of FLD led the TP to believe that it is already the final decision
of the CIR on the disputed assessment. Since the FLD indicates that it is
already the final decision of the CIR, then the PFR must be allowed.
Note: This is an exceptional case. There must be a statement that contains
the same language. Otherwise, the PFR before CTA case shall be
dismissed.
iv. Effect of a Protest on the Period to Collect Deficiency Taxes
CIR v. Wyeth
G.R. No. 76281, 30 September 1991
Caveat: The discussion below is not the same factual milieu in the case,
but has the same concept.
Jan 4 18: A FAN has been issued
Jan 14 18: TP filed a protest through its auditing company SGV. SGV, in its
protest, had mentioned several docs which need to be revisited by the
BIR.
Feb 28 18: BIR reviewed the records of Wyeth
March 15 18: FLD
March 30 18: Protest on FLD, had remained unacted by the CIR.
April 15 18: Wyeth filed a PFR before the CTA.
Has the period to collect been tolled?
Only request for Rein tolls the period; the nature of the case was a
reinvestigation. New visit, it entails additional docs to be revisited. If
recon, they will only review the docs they have in hand or which was
submitted.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
Ruling: Protest filed was a request for reinvestigation. The period shall
be tolled upon the grant of the request. Remember the two elements for
tolling of the period for rein, filing for rein and its grant.
01 04 15: FAN (Date of Assessment)
01 14 15: Protest SGV, on behalf of Wyeth
02 28 15: BIR reviewed docs found in Wyeth
03 15 16: FLD was issued
03 30 16: Protest against FLD
04 15 16: PFR
Pending appeal, the CIR issued a WDL on Jan 15 2018.
Is the right of the government to collect barred by prescription?
No. It was tolled on Feb 28 15, it continued in Mar 15 16. Account the
period that already lapse which is 2 months (Jan 04 to Feb 28). Add 2
years and 10 months, it will be on January 15 2019.
Suppose:
04 01 15 – The FAN was issued
04 15 15 – TP received a FAN
04 30 15 – Protest, submitting additional documents
08 15 15 – The BIR had informed the TP that the BIR shall reevaluate the
docs based on the additional pieces of evidence
09 30 16 – FLD, reducing the amount of tax liability
10 04 16 – FLD received by TP
10 16 16 – TP filed a protest
When is the last day to collect?
2 years 8 months counting from the issuance of the new FLD (09 30 16).
Hence, May 30 2019, date of prescription. If warrant was served after this
date, the right to collect had been prescribed.
The WDL shall be issued and served (and not issued only).
Remember: Republic v. Hizon, distraint proceedings shall be considered
as having been validly begone upon the issuance of the WDL to the TP.
Both must be done within the period prescribed for the government to
collect the tax.
v. Failure of the BIR to act within the 180-day period
Lascona v. CIR
05 March 2012
Lascona had received a FAN and filed a protest, within a period of 30
days. Hence, there is a disputed assessment. Lascona just waited and
waited and waited and waited. When CIR finally decided, Lascona filed a
PFR before the CTA through a PFR.
Argument of BIR: Lascona should have filed before the CTA within 30
days after the lapse of the 180-day period.
Should the PFR be dismissed?
No, because the TP has two options in cases of disputed assessments:
(1) PFR within 30 days after the lapse of the 180-day period; or
(2) To await the decision of the CIR, and filed PFR within 30 days after
the receipt of the decision.
Note: These choices are mutually exclusive. The choice of one precludes
or bars the other.
Lascona chose the 2nd option
RCBC v. CIR
2007
Caveat: Change of dates to 2018
Jan 4 18 – FAN was received by the TP
Feb 1 18 –Protest Hence, there is a disputed assessment.
The CIR did act on the protest. With respect to the 180 days, the CIR can
act until around August, which is the last day of BIR to decide on the case.
Upon the lapse of the 180 days, if the TP shall choose the 1st option, TP
should file PFR around September
91 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

In this case, RCBC waited until December 2018, he filed a PFR in January
2019.
Should the petition be dismissed?
Yes, because it had been filed beyond the 30-day period counter from the
lapse of 180-day period. In this case, the TP chose the 1stoption. If the TP
chose the 1st option, he must file PFR within 30 days from the lapse of the
180-day period.
‘Jeopardy Assessment’ – assessment issued without complete or partial
audit. When the 3-year period is about to end and the CIR rushed into
making an assessment.
Hence, there is a reasonable doubt as to the validity of the assessment. In
which case, it can be a proper subject of compromise, under reasonable
doubt.

What if there is a subsequent decision of the CIR after the PFR? Can
he appeal?

No, because the options are mutually exclusive. The choice of one option
bars the other option

Note: Receipt –TP; Issuance -Collection

vi. Administrative Actions taken during the 180-day period

CIR v. Union Shipping

G.R. No. 66160, 21 May 1990
vs.
CIR v. Isabela Cultural Corporation
G.R. No. 135210, 11 July 2001

CIR issued a FN before seizure (FNBS) > Protest. It should have been an
FDDA. Instead of FDDA, there was no decision on the protest, instead
WDL was issued

Right process/rule: Fan to Protest and it should be FDDA. But in this

case only WDL was issued.

There is no decision on the protest because WDL is not a decision on the

protest.

TPs filed a PFR before the CTA. CIR argued in both cases that the PFR
should be dismissed because of premature filing. CTA can only acquire
jurisdiction over the decision of the CIR over disputed assessments.

Should the PFR be dismissed?

Isabela Case: Yes. WDL is not considered as a final decision of the CIR.
The PFR should be dismissed because it is premature.

Union Shipping Case: FNBS is considered as a final decision, because it

contains a statement “This is your last opportunity to file an appeal”
Hence, apply the principle in Allied Banking v. CIR.

The language or tenor of the FNBS led the TP to believe that it is the final
decision of the CIR which can be appealed to the CTA.

vii. Effect of a Protest filed out of time

Protector’s Service v. CA
G.R. No. 118176, 12 April 2000

The TP filed a protest beyond the 30-day period.

Effect: the assessment shall be considered as final, executory and

demandable. (CIR v. Gonzales)

viii. Remedies from denial of the protest

CIR v. Liquigaz
G.R. No. 215435, 18 April 2016
Effects of a void FDDA

If the FDDA does not contain the law, jurisprudence, the facts, the RR in
which the decision is based, then the FDDA is void. But it does not
necessarily follow that the FAN shall be likewise be void. If the FDDA is
void, then as if there was no decision issued.

Effect: It is okay if the TP will not appeal within the 30-day period

Compromise

See previous discussion (pg. 86)

92 | KAMM Notes

Remedies of Taxpayers after Payment
(1) Refund
(2) Other remedies
a. Action to Contest Forfeiture of Chattel
b. Redemption of Property Sold
c. Availment of Tax Amnesty
Note: For ‘Redemption of RP’ – with respect tax, do not apply the 3-month
period, (only applied if the Mortgagor is a juridical entity, and the
Mortgagee is a banking institution). Hence, if the property is sold in order
to satisfy the tax liability, always apply the 1-year period.
a. Refund
Section 229 and 204(C), NIRC
SEC. 229. Recovery of Tax Erroneously or Illegally Collected.- no suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, of any sum alleged to have
been excessively or in any manner wrongfully collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid under
protest or duress.
Prescriptive Period | 2 years
A claim for refund for OIEP, i.e., overpayment, illegal payment, erroneous
payment and payment of penalties not authorized by law, shall be subject
of refund within 2 years, regardless of any supervening event.
Supervening Event
GR: Supervening events does not interfere with the period to claim
for refund of OIEP
XPN: ‘Supervening Events’ are considered purposes of refund local
taxes.
Hence, if a TP filed an amendment return, which is a supervening
event, the two-year period is reckoned from the filing of the original
return.
Date of Filing | Date of Payment
‘Date of payment’ – Under Section 56A, the tax shall be paid upon
filing of return. Hence, date of payment is date of filing.
Recap | Tax Returns
For, income Tax of corporate TP and individual TP, they will file quarterly
returns and pay quarterly and file an annual ITR, in any.
Procedure in filing a claim for refund
What if I forgot the date? Can I simultaneously file on the same day?
GR: Yes, provided that before the filing of the PFR before the CTA, the
written claim for refund before the CIR must be filed first, because you
will lose the written claim for refund as an attachment for the PFR
(Section 204C)
XPN: There is mathematical error which appears on the face of the
return. Then written claim with the CIR is not necessary.
CIR v. Acosta
G.R. No. 154068, 3 August 2007
Rosemarie Acosta (TP) filed a PFR in the year 1997 for the TY 1996.
Acosta did not file a written claim for refund because according to her,
because she claimed that she filed a prior amended return, and it
included the excess payment of 1 000 000.
Does she need to file a written claim for refund?
Yes, Section 204C will not apply because the PFR was filed before the
effectivity of RA 8424, Jan 01 1998. Prior to 8424, there is no exception to
the rule on the filing of the written claim for refund before the claim of the
judicial claim for refund. Hence, there must be a written claim for refund.
Note: The rule applies only after the effectivity of the 8424.
Can it be applied retroactively?
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
No, it cannot apply retroactive, because it involves substantial privilege
of the TP. Hence, you cannot apply the rule in remedial law that it can
have a retroactive effect.
Period within which to file a claim for refund
Will the two-year period be counted from the payment of quarterly ITR or
annual?
There is an instance where the TP’s income shall be subject to
withholding tax. Suppose, Ma’am Tin is earning 1M monthly, however
her client shall withhold an amount, rather receipt of 850 000.
Technically, the date of payment shall be the date of remittance to the BIR.
Accra Investments Corp. v. CA
G.R. No. 96322, 20 December 1991
When it comes to income tax and others tax liability, the date of payment
is the date when the TP finally determined its, his or her tax liability.
The date of payment shall be the filing of the Annual ITR. The 2-year
period applies to both admin claim and judicial claim for refund
CWT – When should the 2-year period be filed?
Annual ITR. CWT is an advance payment of income tax.
VAT – Quarterly VTR.
Unutilized IV: ZR – Not applied. Apply 112.
Overpayment of VAT: No refund. The only option of the tax payer is to
carry-over the next succeeding taxable year.
Cessation of Business.
Overpayment of IV. Refund under 229 applied. There can be a valid
refund of VAT.
Installment Payments. Two-year period shall be counted from the last
installment payment.
CIR v. TMX Sales
15 January 1992
When it comes to installment payments of tax liabilities, approved by the
BIR/CIR, the two-year period shall be counted from the last installment
payment.
Suppose:
I paid April 15 2018 – I remitted 3 million. The accountant of ma’am Tin
wants to amend the return. Hence, ma’am Tin paid another 1 million in
December 31 2018 through a return.
Until when can ma’am file a claim for refund?
April 15 2020, the reckoning period shall not move to December 31
because the law states “regardless of supervening event”.
However, the additional 1 million, the amendment amount claim shall be
filed until December 31 2020.
Suppose:
TP paid the tax to the local government in 2009 for 5 million under
protest. Under the LGU the refund must be done 2 years from the date of
payment. Hence, the refund should have been filed during 2011.
However, there was a prior case filed questioning the assessment. It was
decided in 2018.
Can there be a valid claim for refund (local tax)?
Yes, because the two-year period shall be counter from the date of
payment and supervening event shall be considered with respect to local
taxes. Hence, the reckoning date is the date of decision. The TP therefore,
has 2 years from the date of the decision to file a claim for refund.
Can there be a valid claim for refund (internal revenue tax)?
No, because under the NIRC, the 2-year period shall be counted from the
date of payment regardless of any supervening event.
93 | KAMM Notes

Remedy: If there is a case filed, prior to the lapse of the 2-year period,
there should also be a written claim for refund and PFR before the CTA
and these cases shall be consolidated before the CTA.
Principle | Remember:
If the written claim for refund has been filed several months before the
lapse of the two-year period wherein which the CIR has the reasonable
time to act on it, the TP must wait for the decision of the CIR. Otherwise,
the judicial claim for refund shall be dismissed on failure of DEAR.
Hence, simultaneous application when the period is about to lapse.
Case: 3 months before the 2 -year period is premature. Must be within 1
month before the lapse of the period.
Grounds for filing a claim for refund
Section 229, NIRC
Engtek Phils v. CIR
CTA Case No. 6644, 26 January 2005
Jan 04 18 – Engtek declared dividend income. Under the NIRC, the
dividend income is subject to FWT (RC, NRC, RA – 10%; NRAETB – 20%,
NRANETB – 25%)
Upon declaration, they remitted the tax however, it shall be distributed
on June 20 2018. The tax liability will incur at the date of declaration.
They remitted Feb 10 18.
Prior to the date of declaration, they changed their mind i.e. no
distribution of income because of lack thereof.
Hence, they filed a written claim for refund.
Should the Judicial Claim for Refund be dismissed?
Yes, because there is no erroneous payment in this case, because there
was already declaration. It should be dismissed because it does not
involve illegal payment erroneous, etc.
CIR v. PNB
G.R. No. 161997, 25 October 2005
Presupposes that there is tax liability
PNB made an advance payment, without any liability yet. Around 10M. In
order for PNB just to credit the advance payment.
“PNB is sipsip”
-Atty. Tin, 2019
For several years, PNB suffered losses. After the 3rd year, PNB had a tax
liability for around 1M each year. There is a balance of 8M.
PNB filed a claim for refund for the 8M.
CIR denied because it was beyond 2-year period.
PNB filed a PFR before the CTA.
Should the PFR be dismissed on the ground of prescription?
No, the claim for refund was not barred, because in order for subject
payment for overpayment, it presupposes that there is a tax liability in
the first place. (Remember)
In this case, when PNB paid the tax of 10 million, PNB had not incurred
any liability. Hence, the 2-year period shall not apply. What should be
applied is the 10-year period under the NCC. Hence, the claim shall
prosper.
IN CASE OF FINAL TAXES
MBTC v. CIR
G.R. No 182582, 17 April 2017
Final Tax and CWT
Quiz SURE! READ!
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
The ruling in MBTC is not applicable to CWT. It applies to FT.
IN CASE OF TP CONTEMPLATING DISSOLUTION
Section 52(C) Return of Corporation Contemplating Dissolution or
Reorganization. - Every corporation shall, within thirty (30) days after
the adoption by the corporation of a resolution or plan for its dissolution,
or for the liquidation of the whole or any part of its capital stock, including
a corporation which has been notified of possible involuntary dissolution
by the Securities and Exchange Commission, or for its reorganization,
render a correct return to the Commissioner, verified under oath, setting
forth the terms of such resolution or plan and such other information as
the Secretary of Finance, upon recommendation of the commissioner,
shall, by rules and regulations, prescribe.
Period to file
The Corporate TP should file an Annual ITR within 30 days after the
adoption of resolution of merger, consolidation or resolution.
BPI v. CIR
28 August 2001
Trivia: BPI Family is different from BPI itself.
This case talks about the consolidation of BPI and Far Eastern Bank, it
became BPI Family Bank.
Jun 30 2017: Far Eastern seized its business operations.
Jul 01 2017: SEC approved the plan of merger/consolidation
Apr 15 2018: BPI Family filed Annual ITR and the annual ITR showed
overpayments made by Far Eastern.
Until when can BPI Family Bank can file a refund and PFR?
The TP will have until July 31 2019 to file an Annual ITR. Hence, the Court
counted it from the last day prescribed by law for the filing of the Annual
ITR with respect to corporations contemplating dissolution, etc.
Remember: Apply this only involving corporation contemplating
dissolution.
Rule: Date of payment is the date when the TP had finally determined his
tax liability – Accra and TMX Sales
Proper Party to file a claim for Refund or Tax
Credit
1. The Statutory TP; and
2. The Withholding Agent
STATUTORY TP
SilkAir v. CIR
SilkAir is not allowed to refund the erroneously excise tax, because
SilkAir is the purchaser of the petroleum products, the excise tax has been
merely shifted to SilkAir. Statutory TP and the tax liability remain to be
with Petron, which is the seller.
WITHHOLDING AGENT
CIR v. Smart Communications
G.R. No. 179045-46, 25 August 2010
The WA has the personality because:
a. It can be held personally liable for the taxes it failed to withhold; and
b. The withholding of the tax and the filing of the return carries with it the
authority to file a claim for refund.
Suppose:
What if the buyer and the seller agreed that the buyer will shoulder the
tax liability? But later the buyer realize that he overpaid over 1 000 000.
Hence, he filed a written claim for refund for the excess payments of CGT.
Does the buyer have the personality to file a claim for refund?
94 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

No, the buyer is neither the statutory TP nor the WA. Further, there is no SEC. 76. Final Adjustment Return. - Every corporation liable to tax under Section 27
commonality of interest between the seller and the buyer. Hence, the shall file a final adjustment return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said
seller has the personality.
taxable year is not equal to the total tax due on the entire taxable income of that year,
the corporation shall either:
Read (A) Pay the balance of tax still due; or
CIR v. PASAR (B) Carry-over the excess credit; or
G.R. No. 186223, 01 October 2014 (C) Be credited or refunded with the excess amount paid, as
the case may be.

Read To whom shall it apply?

Chevron v. CIR Corporate TPs (not individual TPs)
01 September 2015
The following options may be adopted by the TP:
SECTION 112 vis-à-vis SECTION 229 If the income tax due and the income tax paid are not equal.
1st Option: To pay the tax due
Written Claim • If the tax due is greater than the tax payments
for Refund Section 112 Section 229 2nd and 3rd Options: To apply a claim for refund or for the issuance for a
before the CIR
TCC
OIEP: Overpayment,
• If the TP chooses the filing for a claim for refund or TCC, it must be
Illegal Payment,
done within 2 years from the date of payment regardless of any
Type of tax Deals with unutilized input Erroneous Payment,
supervening event.
payment VAT or Payment not
• If the TP choses to carry-over the excess payments during the next
Authorized Under
succeeding taxable years, this is “Tax Credit”.
the law
TP must be VAT
Note: If the SC decided on cases with “irrevocability rule” and used
Registered (because only a
Not necessarily VAT “tax credit”, it pertains to the act of “carrying over”.
Entity/TP VAT Registered TP can
Registered
avail of the unutilized
input VAT) Calamba Steel v. CIR
Input VAT must be G.R. No. 151857, 28 April 2005
Type of Not necessarily
attributable to a ZR/EZR
Transaction engaged in ZR/EZR Prior to RA 8424, the excess payments can be carried over for a period of
transaction
1 year. However, there was no irrevocability rule.
Does not need to
Must comply with the
Invoicing comply with the
Invoicing Requirements i.e. Irrevocability Rule (2nd paragraph of Section 76)
Requirements Invoicing
Word Zero Rated
Requirements
In case the corporation is entitled to a tax credit or refund of the excess
Two (2) years from estimated quarterly income taxes paid, the excess amount shown on its
the date were the final adjustment return may be carried over and credited against the
Two (2) years from the
purchases were estimated quarterly income tax liabilities for the taxable quarters of the
Prescriptive close of taxable quarter
made or date of succeeding taxable years. Once the option to carry-over and apply the
Periods where the sales were excess quarterly income tax against income tax due for the taxable quarters
payment, regardless
made of the succeeding taxable years has been made, such option shall be
of any supervening
considered irrevocable for that taxable period and no application for cash
event
refund or issuance of a tax credit certificate shall be allowed therefor.
Judicial Claim
for Refund Section 112 Section 229
before the CTA When option to carry-over is made, such option is irrevocable for that
May be filed even beyond period. Hence, the TP can no longer apply for refund or TCC.
the two (2) year period, as There is no need to
long as the CIR has been wait for the decision Old Tax Code: It does not exist, because the irrevocability is only for 1
given 90 days to decide, of the CIR. year. Otherwise, it will result to a deprivation or confiscation of PP.
and the CIR has to issue a
decision before the TP can What is important is Present rule: The carry-over of excess payment can be done until the
Prescriptive excess payments are fully utilized (because of the irrevocability
file the claim for refund there is a written
Periods principle)
within 30 days from the claim for refund,
receipt of the decision. before the FPR, it can
be done on the same Under the rules, ff the TP already opted to carry-over the excess tax
There is no longer implied day, if the period is payment, the TP can no longer apply for a claim of refund that had been
denial, under the TRAIN about to lapse. carried over for the next taxable years.
Law.
University Physicians v. CIR
THE DOCTRINE OF EQUITABLE RECOUPMENT 07 March 2018
Is setting-off of taxes against a pending claim for refund allowed?
Does the IR apply exclusively to the carry-over option?
Definition
A claim for refund which is already barred by prescription can be used to The irrevocability rule only applies to the option to carry-over, if the TP
set-off existing tax liabilities. Provided, that they arise from the same opts to file a claim for refund, such option is not irrevocable.
transaction.
Systra v. CIR
Not applicable PH setting G.R. No. 176290, 21 September 2007
1. The principle of set-off/compensation is not applicable to
taxes, because the Government and the TP are mutual T.Y. 2000: The TP filed an ITR on April 16 2001. The ITR shows excess
debtors and creditors of each other. payments acquired in the T.Y. 2000.
2. A refund is a mere privilege. If it is already barred by
prescription, the claim for refund shall be forfeited in favor of T.Y. 2001: The TP filed an ITR on April 12 2002. The TP reflected the
the government. option of the issuance of a TCC. Hence, TP does not want to carry-over the
excess payments.
IRREVOCABILITY RULE
Is automatic application of excess tax credits allowed? If the TP filed an administrative claim for refund for the excess
Section 76 payments in T.Y. 2000 and 2001, will it prosper?

95 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

In a catena of cases, the phrase “for that period” – it is the period when Asiaworld Property v. CIR
the excess payments had been acquired. G.R. No. 171766, 29 July 2010

For in T.Y. 2000, the TP made an option to carry-over, because the excess
payments are reflected on the ITR in April 2001. These excess payments
are called:
‘Prior years’ excess credits’ – the subsequent act of including the excess
payments part of prior years’ excess credits means the TP opts carry-over.
T.Y. 2001: TP filed ITR on April 05 2002. The TP declared MCIT but with
refundable income tax payments, for 2001.
April 9 2002: TP request for refund for excess payments acquired in
2001. The excess payments amounted to 18 million which included the
1999 excess payments. (meaning he opts to carry-over the 1999)

Hence, apply the irrevocability rule. The excess payments in T.Y. 2000
cannot be subject for refund, because it was already carried over.
For excess payments in T.Y. 2001, the option is TCC, hence it can file for a
refund.
CIR v. BPI
G.R. No. 176290, 21 September 2007
BPI acquired several tax credits for T.Y. 1998. The TC arose from (1)
quarterly payments of BPI, (2) Expanded Withholding Tax/CWT (3)
Foreign Tax Credits (because it has operations outside the country,
income earned abroad are subject to withholding taxes, if the TP opts to
tick the box for ‘tax credit’). Hence, it will be deducted as Tax Due.
Same story Pacquiao: If TP did not indicate in his ITR that he will use as TC the foreign
tax payments, then it will be considered as tax deductions.
April 12, 2002: TP filed a judicial claim for refund/PFR before the CTA
Will the JCFR prosper?
No, because 1999 excess payments were added as part of the excess tax
credits.
Will this be considered as confiscation of private property? Will
irrevocability rule be considered as confiscation of private property?
No, because the excess payments can be carried over until it is fully
utilized. The government is not taking any property, it is just a matter of
the timing.
Effect of an existing liability on a pending claim
for refund

In the year 1998, BPI suffered losses. Hence, all excess payments are
excess credits.
BPI carried over the excess payments in 1998 to T.Y. 1999.
BPI suffered losses in 1999, and it still have expanded WT (based on
Gross Sales/Receipts) and Foreign Tax Credit.
Note: you cannot apply the excess tax credits acquired last year to off set the EWT
acquired during the year, not unless it is overpayment of the EWT from last year.
For 1999, BPI acquired excess tax credits. In 2000, BPI suffered losses
and acquired more TC.
In the ITR filed in 2000, BPI indicated opt to carry-over. When it filed the
ITR in 2001, BPI did not indicate the option to either carry over or not.
CIR v. CA and CITYTRUST
G.R. No. 106611, 21 July 1994
CityTrust filed an application for refund amounting to 10 million which
has not been acted upon by CIR. Hence, JCFR.
When the PFR has been file, CTA granted the JCFR. The CIR filed MR,
which was denied by the CTA.
Argument CIR: There exist an assessment amounting to 2 million,
issued against CityTrust for the same T.Y. So, the claim for refund
pertains to excess payments for the T.Y. 1984. Further, no claim for
refund shall be granted because there is an AN for the same T.Y.
Ruling:

April 03 2001, BPI filed for refund. The CTA should have not granted the claim for refund because of the
pending assessment.
What if the claim was for T.Y. 1998-2000?
Claims for refund must be based on a return, which is not subject of an
T.Y. 1998 - Irrevocability Rule assessment because the existences of an assessment casts a doubt to the
T.Y. 1999 - Irrevocability Rule authenticity of the return. Hence, both issues must be resolved by the
T.Y. 2000 – The failure of the TP to indicate its option in ITR does not CTA (i.e. issues on assessment and refund).
mean that it had automatically opted to choose carry-over the excess
payments. CIR v. citytrust
22 August 2006
In this case, failure to tick the box, would not mean carry-over.
After the promulgation of the 1994 case, the lawyer for CityTrust paid
We need to look at the file subsequent act of the TP, the filing of the claim the tax liability amounting to 2 million.
for refund.
Since, there is payment (which extinguishes the 2 million tax due), the
Philam Asset Mgmt v. CIR CTA granted the 8 million refund.
G.R. Nos. 156637, 162004, 14 December 2005
This time, the CIR issued another assessment against CityTrust for a
April 03 1998: The TP filed an ITR for T.Y. 1997. In the ITR, TP showed different taxable year i.e. T.Y. 1985.
excess payments. It did not indicate to carry-over or application for
refund. CIR argument: You cannot grant the refund, because there is an existing
assessment.
Sept 11 1998: TP filed an admin claim for refund.
Ruling:
Will the admin claim for refund prosper?
The pending assessment in 1985 can no longer affect the refund in 1984
Yes, when the TP failed to indicate its choice in the annual ITR, it does not because it concerns a different T.Y. Hence, the CTA properly granted the
necessarily mean that the TP opted to carry-over. Since, the subsequent refund for T.Y. 1984.
act is filing an ACFR, then it is clear that the TP intends to file a claim for
refund for the excess credits acquired in the year 1997. Nature of a Tax Credit Certificate
Read Quiz/Exam/Bar Lesson | Story | TI Friend of Ma’am Tin: TCC is transferrable.
Rhombus Energy, Inc. v. CIR
01 August 2018
PILIPINAS SHELL v. CIR
G.R. No. 172598, 21 December 2007

96 | KAMM Notes

2016 BAR
Nature of TCC
From 1998 to 1997, PH Shell paid excess taxes through the use of TCC.
This TCC were acquired by PH Shell from other BOI registered
corporations.
The TCCs were issued by the duty drawback center of the BIR. PH Shell
and other BOI Corps, executed a deed of assignment which were
approved by the center.
April 22 1998, BIR sent a collection letter stating that PH Shell is not a
qualified transferee of TCC. PH Shell protested.
In 1999, the center required PH Shell to submit sales invoice and
delivery receipts in connection with the post audit of the TCCs already
issued.
Reason for submission of the sales invoice? For the TCCs, because
according to the CIR, TCCs are subject to the requirement of a post audit.
Hence, without such the TCCs are not valid.
Does CIR have the authority to post audit in order to determine the
validity of the TCCs?
Are TCCs subject to suspensive condition i.e. post audit?
Will we apply the provision of Article 1181 of the NCC, in order the
support the validity of the post audit?
Article 1181 does not apply, because the parties (i.e. Government and
the BOI corps) did not agree to any suspensive condition.
EO 226 shall apply. Stating that it does not include a suspensive
condition on post audit. Hence, the post audit is not necessary for the
validity of the TCC.
What if the parties agreed to a suspensive condition?
It is valid, but in this case, the parties did not do so. Thus, if there is an
agreement, then a post audit shall be considered as a requirement for
the validity of the TCC.
Remember:
Since there is no post audit requirement as a suspensive condition, the
TCC are immediately effective and valid.
Nature of TCC |
• A TCC is a certification duly issued by the government that the TP
named therein is legally entitled to a tax credit.
• TCC is an accountable form acknowledging that the grantee or TP
named therein, shall be allowed to use the TC.
Hence, the BOI corps are indeed title to the TC, because they held the
TCCs.
Is PH Shell a qualified transferee because it did not submit the sales
invoice and delivery reports?
TCCs are transferrable. Hence, if the TP is a transferee in GF and for
value, the TP’s right may not be prejudiced by reassessment of the
excise tax liability. Since the CIR did not establish bad faith, hence, PH
Shell’s right shall not be prejudiced.
Refund and Protest are Mutually Exclusive
Remedies
VDA DE SAN AGUSTIN v. CIR
10 September 2001
San Agustin died leaving a holographic will naming an executor. The
Estate Tax had been paid within 6 six months from death. The widow
received a PAN. The widow requested for the reduction/waiver of the
surcharges. Nevertheless, the CIR issued a FAN.
Instead of filing a protest, the Estate paid the tax. After receipt of the
denial of the waiver request, the TP paid, again, the surcharge, but, this
time, under protest.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
The TP filed a PFR before the CTA for a refund of the surcharges (not the
Estate Tax)
CIR argues: The TP did file a written claim for refund, that a written
claim is necessary for the JDCR. The only XPN is when the excess
payments is apparent on the face (which is not the situation in this case)
Should the petition be dismissed?
A written claim for refund is no longer necessary, because the case
involves a disputed assessment.
Further, to hold the TP had lost the right to appeal for ruling on the
disputed assessment, would in effect require him to go through useless
proceedings. Because, in the first place, his request has already been
denied.
The law should not be interpreted as to result into absurdities.
Recap
GR: Filing a written claim is mandatory. Otherwise, the JCFR shall be
dismissed.
XPN:
1. If excess payment appears on the face of the return; or
2. Situation where there is disputed assessment, where the TP
questioned the disputed assessment and paid the tax under protest
because a written claim shall be a useless or need less formality.
Is the taxpayer entitled to claim interest on the
refunded tax?
Section 79 (C) 2, NIRC
SEC. 79. Income Tax Collected at Source.
(C) Refunds or Credits.
(2) Employees. -The amount deducted and withheld under this Chapter
during any calendar year shall be allowed as a credit to the recipient of
such income against the tax imposed under Section 24(A) of this Title.
Refunds and credits in cases of excessive withholding shall be granted
under rules and regulations promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall
be returned or credited within three (3) months from the fifteenth (15th)
day of April. Refunds or credits made after such time shall earn interest at
the rate of six percent (6%) per annum, starting after the lapse of the
three-month period to the date the refund of credit is made. Refunds shall
be made upon warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of counter-signature by
the Chairman, Commission on Audit or the latter's duly authorized
representative as an exception to the requirement prescribed by Section
49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292,
otherwise known as the Administrative Code of 1987.
Is the TP entitled to claim interest on claim for refund?
Yes.
79(c)2 talks about the refunds applied by an EE.
Who should issue the refund?
The ER.
Suppose:
Francis is the EE and Tin is the ER. As an ER, she will withhold the tax and
remit it to the government. ER should have withheld 20 000 but ER
withheld 35 000. Thus, there is an excess withholding of 15 000.
ER is duty bound to deliver the amount to be refunded to the EE. The ER
shall reflect the over remittance in his return, so that the ER can utilized
it as credit against the withholding tax for the next succeeding year.
Reminder:
Difference between FT and CWT.
FWT will extinguish the TP’s liability upon withholding and remittance.
On the other hand, CWT/EWT considered as advance payments.
Remedies Available to the Government
97 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Not yet asked in the BAR

No Injunction Rule; Exceptions
SEC. 218. Injunction not Available to Restrain Collection of Tax. - No
court shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge imposed by
this Code.
First Principle | No Injunction against the collection
GR: There can be no injunction against the collection of any national
internal revenue tax. Hence, the Government cannot suspend the
collection of the same. A TP cannot pray before the Court to enjoin the
collection of taxes, notwithstanding the TP has a pending appeal before
the CTA.
XPN: Under RA 9282, the CTA may suspend the collection of tax, provided
there is a prejudice to the right or interest of the government and/or the
right of the TP.
If the CTA suspends, the CTA may require either:
(a) the deposit of the amount being claimed or
(b) posting of a surety bond, not double the amount to be collected.
Suppose:
Pending injunction case before the RTC.
Sps. Pacquaio filed before the CTA and claimed that the assessment by
the BIR is defective because it is predicated on mere allegation. Further,
the assessment notice was not served upon them, hence violation of due
process.
The CTA required the sps. to post a bond, without a conduct of a prelim
hearing. Hence, it is not proper for the CTA to require them to post a
bond.
Ruling:
There has to be a hearing to be conducted first in order to ascertain on
WON there is a necessity to suspend the collection of the tax. Hence,
there has to be a prelim hearing first before requiring the TP to post a
bond or deposit.
There’s even a possibility the CTA can dispense with the requirement of
posting a bond or deposit an amount, when:
1. The method employed by the CIR is patently in violation of law;
2. When prescription has already set in; and
3. When the method of collection is not sanctioned by law.
Because in these cases, the interest of both G and TP has been jeopardize

Is this allowed? The spouses had validly raised the defense: the service of AN were not
made upon them, hence, the AN shall be invaid. However, in order to
No. conclude that there is violation of due process, the CTA must have
conducted a prelim hearing to determine the right act first.
First, there can be no injunction against the collection of any internal
revenue tax. Recap | Suspension of Collection

Second, assuming arguendo it falls under the XPN, the RTC does not have
any jurisdiction to issue such injunction.
Suppose:
If the CTA suspends the collection of the tax, and the CTA would require
the TP to deposit the amount being claimed or to post any surety bond,
can the CTA do so without preliminary hearing?
GR: Collection of tax cannot be suspended. Notwithstanding, the TP filed
a PFT before the CTA.
XPN: If it can be established that the collection would jeopardize the
interest of the government and/or the TP.
Provided, the CTA must require the TP to post a bond or deposit the
amount claimed.

No. Provided further, the CTA must conduct a prelim hearing in order
to determine if the posting of the bond is necessary and the amount
of bond to be posted.
Second Principle | Preliminary Hearing
If the CTA suspends the collection of the tax, and if the CTA would require
In the case of Tridharma, such situation could have been avoided if
the deposit or to post a bond, it must be preceded by a preliminary
the CTA conducted a preliminary hearing first.
hearing.

The CTA can dispense with the requirement of posting a bond or amount
TRIDHARMA v. CTA
to be deposited, in cases when:
20 June 2016
1. The method employed by the CIR is patently in violation of law;
Lack of Prelim Hearing | Suspension of collection of tax
Already asked in the BAR
2. When prescription has already set in; and
3. When the method of collection is not sanctioned by law.
Tridharma filed PFR with motion to suspended the collection, the CTA Because in these cases, the interest of both G and TP has been jeopardize.
grant the motion, provided that Tridharma shall post a bond equivalent
to 150% of the assessment amounting to 6 billion. Administrative Remedies

The TP filed a motion to reduce the bond, the CTA reduced it to 4 billion. i. Action to Contest Forfeiture of Chattel
Section 231, NIRC
However, the Amount of 4 billion is nearly 5 times the net worth of
TridHarma. Principles to remember:
1. It will only apply to the seizure of PP under the claim of forfeiture;
Ruling: 2. The owner will contest the same; and
While it is true that the CTA can require the TP to either deposit or post 3. It should be done at any time before the sale or destruction of the
a bond, but it should not be double the amount to be collected. PP.

However, even if the amount being required is not double the amount, If the forfeiture shall be questioned after sale it must be done within 6
the CTA erred in requiring the TP to post a bond which is nearly 5 times months after sale.
the amount of TP’s net worth without conduct of any preliminary
hearing. If such is granted and sold, then it can no longer recover the PP because
the buyer is buyer in GF. Hence, the TP can only redeem the excess
There must be conduct of prelim hearing in order to ascertain whether proceeds.
there were grounds for the suspension, in order to determine if it will
jeopardize the right of the government or the taxpayer. ii. Redemption
Section 214, NIRC
Simply prescribing such high amount of bond without the conduct of a
prelim hearing would practically deny the TP the opportunity to contest Period to Redeem
the validity of the assessment. For RP sold at public auction, in order to satisfy the tax liability. The TP
has a period of 1 year reckoned from the date of sale to redeem the
SPS. MANNY & JINKEE PACQUIAO v. CTA & CIR property.
G.R. No. 213394, 06 April 2016

98 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

3-month period not applied Should the CTA dismiss on the ground of lack of jurisdiction over the
Do not apply the 3-month period, because such rule is only case?
applicable if the Mortgagor is a juridical entity and the Mortgagee is
a banking institution. No. The CTA has jurisdiction.

No deprivation of RP If the PT raised the defense of prescription with respect to the collection
During the 1-year period, the TP shall not be deprived of the property. of tax, such issue falls under ‘other matters’ under the tax code or other
Hence, the TP has the right to collect the rents, if any. special laws.

iii. Tax Lien Note: Yung O sa “DROP”.

Section 219, NIRC
CIR v. NLRC
Section 219. Unpaid taxes shall constitute tax lien over the property of the G.R. No. 74965, 09 November 1994
TP.
The TP has tax liability, and, at the same time, liabilities to its EEs.
iv. Levy and Distraint
What issue shall be dealt first? What is the priority?
Levy | Distraint
The act of the government to serve a notice upon the TP with respect to NIRC: Claims of the EEs must take preference over the claims of the
the TP’s real property. On the other hand, distraint refers to personal government with respect of satisfaction of tax liability pursuant to
property. Article 110 of the Labor Code.

Notice | Levy There is tax liability, assessment, protest, WDL, etc. However, the TP did
Hence, it is a notice to the TP and a notice to the whole world through not file a PFR. Hence, the assessment became final and executory. The
publication and a registration with the ROD. CIR issued WDL over the properties.

Note: These properties (either RP or PP) must be sold at a public auction. Actual Distraint – taking of actual property which will be sold in
public auction
v. Garnishment Constructive - no actual taking, only a service of notice. Upon
service, it will constitute confiscation of the property. TP will
This refers to: already be prohibited of disposing of a property.
• Bank deposits
• Shares of Stocks Under both situation, the prop cannot be disposed of. The
• Receivables only difference is the actual possession.

In this case, there is constructive distraint (i.e. service of notice).

vi. Availment of Tax Amnesty
Section 214, NIRC
(Remember these 3 concepts)
Tax Amnesty – There is already a tax liability, then it was condoned.
Tax Exception – Prior to the accrual of tax liability.
Tax Assumption (Mitsubishi Case) – The Liability is existing, but a
different person will assume the liability. In this case, it was the republic
who assumed the liability under the Exchange of Notes.
Possession is still under the TP.
NLRC sold the properties under public auction.
BIR: questioned the same because there was already constructive
distraint.
CIR: We can still sell the prop, regardless of the WDL, because under
Article 110 Labor Code, claims of EEs shall take precedence.

Tax Amnesty under RA 9840, superseded by the new tax amnesty
law
If the Tax Amnesty law does not cover withholding agents, then the
withholding agents cannot apply for an amnesty for the withholding tax
liability.
Because, you cannot compromise withholding taxes, because it was
already collected.
Ruling:
Article 110, Labor Code is only applicable in case of dissolution of the
Corporation and does not apply in this case.
Since BIR had already validly serve a notice of distraint, the property
will only be used for the satisfaction of the tax liability.
Issue on Tax Lien

Period within which the Government could NIRC: Walang tax lien, because the tax is not imposed on the barges or
the property itself. That, tax Lien will only exist or only applicable when
Collect applied on the property itself.
Section 203, 222, NIRC
Ruling:
3-3 | 10-5 Unpaid taxes attach to all properties, notwithstanding the fact that these
Reckoned from the ‘Date of Assessment’ – issuance of the AN. properties are not attached by the government.

CIR v. HAMBRECHT AND QUIST PH

G.R. No. 169225, 27 November 2010
Judicial Remedies in Detail
Section 220, NIRC
TP failed to file a protest. Effect, the assessment becomes final, executory
and demandable. Further, TP cannot raise the defense of prescription, Institution of criminal or civil cases
but only to issue of assessment. The legal division of the CIR has the authority to institute a civil action.

The WDL was issued beyond the period of collection of tax, hence,
beyond the 3-year period, TP filed a PFR before the CTA. Praying for the
annulment of the WDL on the ground of prescription.
CIR argued: The CTA no longer has jurisdiction over the case because
CTA will only acquire jurisdiction on disputed assessments. Since, the
TP failed to protest > assessment becomes Final and Executory. Hence,
CTA has no jurisdiction.
‘Institution’ is the act of initiating a complaint.
Original Action | Not Appeal
The original action may be instituted by the legal division of the CIR.
However, it does not cover appeals, because appeals made by the
government, must always be done by the Solicitor General.
CIR v. LA SUERTE CIGAR
G.R. No. 144942, 4 July 2002

99 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Re: Participation of the Solicitor General CIR v. JAVIER

G.R. No. 78953, 31 July 1991
Section 220, NIRC pertains only to the filing of original actions and not to Fraud Penalty
appeals. Hence, appeals must be made by the OSG.
TP had been receiving remittance every month, $100. One time, he
received $1000.
Civil Penalties
Chapter 1, Title X, NIRC Tax 1: It is taxable, flow of wealth, income from whatever source.

(Bar 2018) Is it subject to 50% surcharge?

Additions to tax are: There is filing of a return but he did not include the $1000. Hence, the
1. Surcharges $1000 is not taxable.
2. Interest
3. Compromise Penalties However, he stated under the return that “I have received $1000 from an
unknown source”
Surcharges
What rate should be imposed i.e. 25% or 50^?
Two kinds:
1. Ordinary Surcharge In this case, CIR imposed 50% surcharge because according to them,
2. Fraud Penalty there was fraud for not including the $1000 in the ITR?

i. Ordinary Surcharge Is the imposition correct?

Rate No, because the act of indicating the fact that he had received a certain
25% based on the tax due. amount from an unknown source is indicative that there was no fraud,
only that, he does not know how to deal with it. If he wants to evade
Impositions such, then he should not have signified its receipt.
One-time imposition.
Hence, the proper rate of surcharge to be imposed shall be 25%.
It will be imposed if there is:
1. Failure to pay the tax on time; Compromise Penalty
2. Failure to pay deficiency tax within the time fixed by the notice;
3. Filing of the return with the wrong office Mandatory Impositions of Additions to Taxes
Interest and Surcharge -mandatory
Where filed Compromise Penalty – mandatory but can be reduced
Place of residence
CIR v. ST. LUKE’S
Suppose: G.R. No. 203514, 13 February 2017
TP filed in RDO located not at the place of his residence. TP should be Bar
subject to 25% surcharge, because it has been filed before the wrong
office. TP asked if he is exempt tax from receiving?

ii. Fraud Penalty Section 30, NIRC: If the income has been sourced from a propriety
activity regardless of the disposition, it is taxable. Regardless of how the
Discussed Below income had been used, except if the NSNP EI, which enjoys omnibus tax
exemption Article 14 of the PC.
Fraud Penalty
Hence, the income from paying patients is taxable, because it is an
Rate income from a proprietary activity.
50%
What rate should be applied?
Imposition
Only if there is a fraudulent act of the TP. Section 27, NIRC. Predominance Test. 50% from related activity – 10%
Tax Rate. Not related – 30% Tax Rate.

Presumption of Fraud Is there imposition of compromise penalties and surcharge?

Under current RR: If there is under declaration of sales of equivalent 30%
of the correct sales, then there is presumption of fraud (Bar 2018). No, because the TP acted in GF in relaying upon the ruling issued by the
CIR. Hence, no compromise penalty shall be imposed.
If the TP can rebut such presumption, then fraud penalty cannot apply.
(Bar) NSNP Religious Institution, leased its land.
Delinquency Interest and Deficiency Interest
Is the income taxable?
Section 248B, NIRC
Section 27 does not pertain to NSNP Religious Institution. The
Rate
predominance test applies only to proprietary Hospital and Educational.
RA 8424 – 20% per annum
Hence, proprietary religious institutions are subject to 30% tax.
TRAIN Law – Double the amount of legal rate (Legal Rate is 6%, thus rate
is 12%)

Difference
‘Delinquency Interest’ – TP not paid on time
‘Deficiency Interest’ - there is assessment, the subject for assessment shall
be subject to interest
• RA 8424: Implementation of BOTH delinquency interest and
deficiency interest
• TRAIN law: Implementation of one kind of interest ONLY

100 | KAMM Notes

 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Local Taxation
III. LOCAL TAXATION The QC has the power to impose all the taxes, provided that they will not
violate Constitutional (i.e. Due Process, Equal Protection) and Statutory
Limitations (Section 130 and 133, LGC)

LOCAL GOVERNMENT TAXATION MACTAN CEBU v. MARCOS

11 September 1996
Nature and Source of Taxing Power
MCIAA is an Instrumentality of the Government

Section 5, Article X, PC. Each LGU shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such
MIAA is an Instrumentality of the Government.
guidelines and limitations as the Congress may provide, consistent with
the basic policy of local autonomy. Such taxes, fees, and charges shall Remember!!!!
accrue exclusively to the local governments. Instrumentality – Exempt from Tax under BOTH NIRC and LGC.
GOCC is not exempt from tax. It was withdrawn under Section 193 of the
Principle of Local Autonomy | Section 5, Article X, PC LGC. Hence, all GOCCs enjoying tax exemption prior to the LGC, enjoys no
Subject to the conditions set by the Congress, the LGU can levy taxes, fees tax exemption after its enactment.
and charges.
Extent of the Power of Congress in Local
Will the LGC impose a tax liability upon a TP?
Taxation
Suppose:
LGU was not able to enact an ordinance imposing transfer tax. The LGU Quezon City v. Bayantel
collected transfer taxes from several TP on their RP. The TP questioned G.R. No. 162015, 06 March 2006
the imposition on the ground that there was no ordinance. LGU argued Extent of the power of Congress in local taxation

that while it is true that there was no ordinance, the LGC provides that
LGU can impose local taxes?
Whose argument is correct?
TP’s Argument.
The LGC merely imposes limitations upon the power of the LGU to collect
the tax. Hence, the LGU are still required to enact ordinance for its
impositions. Otherwise, there is a violation of the due process clause.
Grant of Local Taxing Power under the Local
Government Code
Power Directly Conferred by the PC
The power of the LGU are no longer considered as delegable power.
Rather, a power directly conferred under the Constitution.
The delegated power had been removed under 1987 Constitution. Prior
to the 1987 PC, the LGU still have a delegated power. Hence, before LGU
can collect taxes, they would need to request from the Congress a law that
would grant them the power to collect.
Under the 1987 PC, they no longer need to request from Congress such
power, they can immediately collect from the TP.
Power of LGU, NOT Inherent
Power of Taxation of the LGU are not inherent. What is inherent is the
power of the Republic/State to Tax. The power of the LGU does not exist
upon its existence, this principle only applies to the State.
FERRER v. HON. BAUTISTA
G.R. No. 210551, 30 June 2015
Delegated Power
Bayantel enjoys a legislative franchise from the Congress. Legislative
Franchise can be revoked, altered and modified.
Under the Charter, it enjoys exemption from RP taxes, among other
taxes. The Congress enacted the LGC. In the LGC, there was a blanket
withdrawal under Section 193: All exemptions granted in favor of any
entity including GOCCs shall be withdrawn. Hence, under LGC, Bayantel
no longer enjoys RP Tax Exemption.
Instead of questioning the provision of the LGC, Bayantel lobbied for the
amendment of its charter. Hence, there is another tax exemption
granted in favor of Bayantel.
Is the amendment allowed?
Ruling
Yes, the grant of exemption was given by Congress. Because the taxing
power can still be exercised by the Congress with respect to grant of
exemptions.
Exercise of Taxing Power of the Congress
Remember:
For imposition of taxes, the Congress can set limitations.
For grant of tax exemptions, the Congress can provide for tax exemptions.
However, the Congress cannot diminish the power of LGU granted under
the Constitution.
Therefore, the Congress is limited to setting limitations.
Tax Amnesty
The Congress did not grant the tax exemption of Bayantel not until 2
years.
Is Bayantel liable for the taxes for that 2 years?

The LGU collected social housing tax and garbage fees. Yes.

Is the imposition of social housing tax valid? What if under the amendment Charter, the Congress enacted another law
condoning all the liabilities of the Charter (Tax Amnesty).
Yes, if it is intended for public purpose. In this case, the social housing tax
was for the purpose of removing the slum areas, hence, for public Is this allowed?
purpose.
No, because the Congress is already depriving the LGU of its income
Is the imposition of Garbage Fees a tax or a fee? which had already accrued. Hence, the LGU (not the Congress) who has
the authority to condone such tax liability.
Garbage Fee is not tax.
Residual Powers
In order for an imposition shall be considered as fee, there must be:
Section 186, LGC
1. Amount – must be minimal or equivalent to the cost of the
collection; and
Definition
2. Submission of additional requirements - Otherwise, tax. The
Power of the LGU to impose taxes which are not imposed under the NIRC
amount is more than the amount of inspection
and which are not imposed by other LGU.

101 | KAMM Notes


Read: The LGC, and list the taxes that can be imposed by the
municipalities and provinces.
Suppose:
The Transfer Tax should have been collected by the province. However,
the municipality wants to collect such because it was not being imposed
by the province.
Is this allowed?
Yes. Residual Powers.
Alta Vista Gold and CC
Mandated | Read Read Read
Fundamental Principles
Section 130, LGC
Fundamental Principles | Section 130, LGC
(a) Taxation shall be uniform in each LGU;
(b) Taxes, fees, charges and other impositions shall:
(1) be equitable and based on the taxpayer's ability to pay;
(2) be levied and collected only for public purposes;
(3) not be unjust, excessive, oppressive, or confiscatory;
(4) not be contrary to law, public policy, national economic policy,
or in the restraint of trade;
(c) The collection of local taxes, fees, charges and other impositions
shall in no case be let to any private person;
Chismis:
During Panagbenga, the LGU is not the entity that collects the fees
and charges on stalls, rather, it is the Baguio Flower Festival
Foundation. It was questioned before the COA because the
collection shall not be let to any private entity.
Hence, the LGU assigned a detailed EE on BFFF to cure such defect.
(d) The revenue collected shall inure solely to the benefit of the LGU
levying the tax, fee, charge or other imposition unless otherwise
specifically provided herein; and,
(e) Each LGU shall, as far as practicable, evolve a progressive system of
taxation.
Note: (a), (b) and (e) are Constitutional Limitations.
PELIZLOY v. TUBA
2013
Section 130
Ruling:
In order for an ordinance to be valid there has to be compliance with:
1. Section 130 on Fundamental Principles; AND
2. Section 133 on the Rule of Pre-emption
Common Limitations on the Exercise of the
Local Taxing Power
Rule on Pre-Emption (Bar)
GR: A LGU can no longer impose a tax upon a subject matter which is
covered by an internal revenue tax imposed by the National Government.
XPN: If the imposition of such tax is allowed under the LGC.
Example:
Local Business Tax under the LGU of Baguio is equivalent to 2% of the
gross sales, which is the same for VAT and OPT. Thus, the rule on pre-
emption should have been applied. However, since the LGC allows the
imposition of Local Business Tax then the LGU can collect Local Business
Tax.
PELIZLOY v. TUBA
2013
Trivia: The counsel is VP Barlis
The LGU province of Tuba, collected an amusement tax from Pelizloy,
the corporation that owns Palmgrove.
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
LGU collected because of the newly enacted ordinance, which states
that amusement taxes shall be collected from amusement places (i.e.
resorts, sauna, etc.)
Remedy of the TP:
GR: File an appeal before the SOJ within 30 days, provided under
Section 187. Otherwise, any case filed before the court shall be
dismissed.
XPN: Entail the doctrine of DEAR.
Here, there is an appeal before the Secretary of Justice. When there was
an inaction for a period of 30 days, the TP filed a petition for declaratory
relief before the RTC (not CTA, because the case involves a local tax).
Local tax (Constitutionality of ordinance): go to SOJ then RTC (not
CTA).
Interpretation of NIRC: go to SOF, then CTA.
In this case, the RTC ruled that the LGU has the power to impose
amusement taxes.
Ruling:
In order for an ordinance to be valid, there has to be compliance with
Section 130, LGC.
In this case there was compliance with Section 130, but there was no
compliance with 133 of the LGC.
The amusement tax being collected is based on gross sales which is
equivalent to OPT, and OPT is already being collected by the national
government.
Argument of LGU: While it is true that it is an OPT, it is still an
amusement tax allowed by the LGC.
Supreme Court: Such tax cannot be imposed in this case, because
amusement tax under the LGC contemplates, theaters, cinemas, and
other amusement places. The term ‘amusement places’ refers to places
related to the artistic display of performance.
“Although, individuals who would go to a resort will be
visually engaged in seeing other individuals in the resort,
there is no display of artistic performance.”
-Justice Leonen, 2013
Note: Amusement Tax | Another requisite: There has to be admissions
fees.
Read | Cases of YAMANE, ERICSON, GRECIA, IGNACIO under Tax
Remedies
Province of Bulacan v. CA
27 November 1998
The LGU imposed a tax on the extraction of sand, gravel and earth on
both on public and private lands.
Ruling:
The LGU cannot impose a tax on the extraction of the sand, gravel and
earth from private lands because the extraction thereof is already
subject to excise tax (which is an internal revenue tax).
Applying the rule on pre-emption, if the national government have
already imposed a tax upon the same subject matter, then the LGU can
no longer impose the same.
XPN | Public Lands
Since excise tax is not imposed on public land, then the LGU can impose
a tax on the same.
Local Tax on Common Carriers
FPIC v. CA
G.R. No. 125948, 29 December 1998
Section 133 | Local Tax on Common Carriers
FPIC is a pipeline operator, which is considered a common carrier.
102 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Ruling: 1. Capitalization; and

Since a pipeline operator is considered a CC, it is subject to 3% OPT
based on gross sales, also called CC’s tax. The National Government is
the one imposing such. Since the NG is already imposing a tax on the
gross receipts/sales of CC, the LGU can no longer impose a tax on the
same.
FPIC is no longer subject to local business tax, because it is already
subject to CC’s tax.
PALMA v. MUN. OF MALANGAS
G.R. No. 152492, 16 October 133e
Section 133e, LGC | Wharfage dues
LGU enacted ordinance imposing service fees for the use of the local
roads leading to the wharfs and shorelines within the jurisdiction of the
municipality, used for surveillance.
However, the LGU imposed a tax based on the weight of the products
being transported.
Is this legally allowed?
No. Although LGU are empowered to impose tolls, fees and charges for
the use of road, these roads must have been funded by the LGU.
In this case, the road was not funded by LGU.
Worse, the service fee being collected is in the guise of a wharfage due,
apparently because the amount being collected is based on the weight
of the goods. Under Section 133e, LGC, LGU are not allowed to impose
fees that are in the guise of wharfage dues/fees.
BATANGAS POWER CORP. v. BATANGAS
G.R. No. 152675, 28 April 2004
Section 133g, LGC | BOI
Section 133G, LGC – Grant of exemption for BOI registered pioneer
enterprises. These enterprises are exempt from local tax for a period of
6 years.
Is the 6 years reckoned from date of registration or start of
commercial operations?
Start of date of registration because it is a local tax.
If it deals with exemption from income tax (i.e. national tax), reckon
from the date of start of commercial operations (SCO).
Note: This rule is exclusive to BOI corporations.
2. Dependents on Government
Coops registered with the CDA are not dependent on the Gov’t,
rather they raised their own funds. Coops registered with NEA are
dependent on the Gov’t.
Prov. Assessor of Agusan v. Filipinas
G.R. No. 183416, 5 October 2016
Section 133n, LGC | Coops reg. with CDA
(Possible BAR)
Filipinas occupies parcels of land owned by NDC. NDC transferred such
lands to beneficiaries of CARL. The beneficiaries formed a coop
registered with the CDA.
Thereafter, the coop and Filipinas executed leased.
Local Tax
The coop is not subject to local business tax because under Section 133n
of LGC, LGUs are prohibited from imposing a tax upon coops registered
with CDA.
Real Property Tax
Section 234(d) of LGC a basis of exception is sufficient in itself. The fact
alone that it is owned by the coop reg with CDA is adequate
(notwithstanding the fact that the beneficial user is Filipinas).
Ruling:
The exception from RP tax given to coop applies regardless of whether
or not the land owned is leased. Therefore, the exemption benefits the
cooperative’s lessee.
Coverage of RP Tax
Filipinas uses road equipment in order to harvest the fruits. Road
equipments are movable properties under NCC.
What is the coverage of RP tax?
Real properties i.e. those defined under Article 415, NCC.
Will it include road equipments?
Yes, if there is a character of permanency (it should meet the
business needs).
In this case, it is needed by Filipinas, hence, the road equipment and
hollers are RP, because, Filipinas engaged in palm oil plantations, since
it harvests fruits, transportation is indispensable for its operations. The
indispensability of the road equipment in transportation makes it ADE
use for its business. Hence, subject to RP tax.

MIAA v. CA & PARANAQUE Recent Case | Batangas

G.R. No. 155650, 20 July 2006
Section 133o, LGC
MIAA is instrumentality, hence, exempt from both local and RP tax,
except portions being leased to taxable entities.
Exemptions of Coop Registered with CDA
Submarine Cable Lines, regardless if it’s just a cable, cable wires are
necessary for the business of the TP, hence, RP. Moreover, it is attached
to an immovable property which is the water.
Petron v. Tiangco
G.R. No. 158881, 16 April 2008
Petroleum Products | Section 133h, LGC

Section 133N, LGC – Exemptions of cooperatives registered with the CDA.
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the "Cooperative Code of the Philippines"
respectively; and
Argument of LGU: This local tax shall pertain those in the nature of a
franchise tax.
Ruling:
Sale of petroleum products shall not be subject to local tax. Section
133H, LGC, does not make any qualification as to the kind of tax
imposed, to wit:

Philreca v. DILG Section 133(h) Excise taxes on articles enumerated under the
10 June 2003 NIRC, as amended, and taxes, fees or charges on petroleum
Equal Protection Clause
products;

Philreca is registered with the NEA and not with the CDA. In both 234(a)
Consolidated Cases
of NIRC and 133n of LGC, only coops reg. with the CDA are exempt.
City of Manila v. Colet & Malaysian Airline System
Philreca argues that these provisions violate equal protection clause.
G.R. No. 120051, 10 December 2014
Read!!!! Quiz exammmm!
Is there violation of equal protection clause?

No, because there is substantial distinction between registered CDA and

NEA:

103 | KAMM Notes

 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Ordinance: 3% tax (later reduced to 1%) shall be imposed on keepers XPN: If the transfer refers to those:
of garage, cars for rent or hire, or transportation contractors. They are (a) registered with the National Housing Authority (NHA); or
CCs (which are business tax). (b) Low costs/socialize housing.

The ordinance is not valid because the same subject matter is already Rate
subject to CC’s tax. Under the LGC, the LGU can only impose a tax not exceeding of 50%
of 1% of the selling price or FMV whichever is higher.
City of Manila: Section 143H should prevail (i.e. imposition of local
business tax) Market Value | Assessed Value
The market value does not include zonal valuation (do not
Ruling: apply the rule under CGT). Hence, the MV in this case refers
133J prevails over 143H. to the assessor’s valuation.

143H defines the general power but does not contain a specific grant of Suppose:
power to impose business tax. A province imposed a rate higher than 50% of 1%, can the TP
question the legality?
As a mere general power, it shall be limited, to the powers indicated
under the LGC and the limitations are found in 133 with respect to pre- Yes, because a LGU can only impose taxes under the limitations
emption. provided under the law.

Batangas City & Its LT v. Pilipinas Shell Trivia (City of Davao): No increase for several years, but there was
G.R. No. 187631, 8 July 2015 a one-time imposition of 300% increase. The Supreme Court held
Section 133h, LGC | Section 232 IRR LGC that the increase was proper, computing the number of years that
had lapse.
Pilipinas Shell is engaged in oil refinery and depot.
2. Tax on Business of Printing and Publication
Can a LGU impose local business tax on Pilipinas Shell?
Limitation
No local business tax shall be imposed because under Section 232, IRR It will not apply to books or other reading materials prescribed by
of LGC, businesses engaged in the production manufacture, refinery, DECS.
distribution or sale of oil, gas, or other petroleum products shall not be
subject to any local tax. Rate
It must not exceed 50% of 1% of the gross annual receipts of the
Mayor Lim v. RTC Judge Colet preceding year.
G.R. No. 120051, 10 December 2014
Section 133j, LGC | Shipping Lines Newly Registered TP
If the TP is newly reg, the amount of tax shall not exceed 1/20
Can the LGU impose a tax upon these shipping lines?
of 1% of the capital investment.

No, because they are CCs. Since it is already subject to CC’s tax, it can no
Note: This limit applies to local business tax.
longer be subject to any type of local business tax.

Chismis/Story:
Amusement tax NIRC vis-a-vis LGC
LGU must have an ordinance first prior to the imposition of tax.
LGC NIRC
However, not all ordinance states the 1/20 of 1% of the capital
Theaters, cinematographs, Under OPT, it covers night clubs,
investment.
concert halls, circuses and other cockpits, cabarets, boxing
amusement places. exhibitions, professional
If the ordinance is not amended, the LGU cannot collect from newly
basketball games, jai alai, race
registered entities, because they do not have any gross receipts of
tracks (kabayow) and bowling
the preceding year (because they’re new).
alleys.

3. Franchise Tax
PBA v. CA
8 August 2000
Definition
Amusement Tax
Tax imposed on the privilege of enjoying the franchise within the
locality.
LGU impose amusement tax on PBA.

Public Service
Will it be subject to amusement tax?
Telecom and transportation are covered because franchise deals
with the exercise of public service.
No, already subject to NIRC tax, and it is not covered by the definition of
“other amusement places” because it does not have any visual or artistic
Even if the municipality granted the franchise, the province has the
display of performance.
authority to collect the franchise tax.

Read
SMART COMM v. DAVAO Suppose:
on franchise If the province forgets to collect franchise tax, can the municipality
QUEZON CITY v. ABSCBN collect such?
on franchise
SAN JUAN v. CASTRO Yes, residual power.
on transfer tax
Rate:
50% of 1%
Scope of Taxing Power 1/20 of 1%

Taxes that can be imposed by Provinces Coverage of Franchise Tax (Read | Mandate)
1. Public Utilities;
1. Transfer Tax 2. Legislative franchise of State-chartered corporations; and
3. Commercial Franchises
Subject Matter
GR: If the transfer of ownership refers of a RP (not PP). Question! Answer next meeting…

104 | KAMM Notes

 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Just remember the list of TPs subject: Theaters, cinematographs,

Will you consider PAL as a public utility? If yes, will it be subject to concert halls, circuses and other amusement places (i.e. display of
franchise tax imposed by the LGU? artistic perfomance.

SkyCable v. Quezon City 7. Annual fix tax for delivery trucks, van, manufacturer, dealers,
Possible BAR wholesalers, retailers, etc.

SkyCable questioned the validity of the ordinance imposing Amount

franchise tax and business tax upon Telecom companies. Hence, Amount must not exceed 500.
SkyCable claimed that the imposition is considered as a direct
double taxation, hence, a violation of the due process clause of the Taxes that can be imposed by Municipalities
PC for being confiscatory.
1. Business Tax
Is the argument tenable?

YAMANE v. BA LEPANTO
No. The imposition of both franchise and business tax upon the
G.R. No. 154993, 25 October 2005
same entity, is not considered as a violation of due process clause,
Read | Exam
because it is not a direct double taxation because the SMs are
different (i.e. right to enjoy franchise and right to enjoy a business
Imposition of local business tax on association dues collected by
within the locality)
homeowner’s association. If the association dues are collected by HOA
and Condo Corp.
SMARTCOMM v. CITY OF DAVAO
16 September 2008
Will it be exempt from VAT?
Franchise Tax

Ruling Yes, because it is not in the ordinary court of business.

An entity can be held liable for BOTH local and national franchise tax.
National Franchise Tax | Water and Gas Utilities as Exception
GR: National Franchise Tax has already been removed (it is now OPT).
XPN: 2% franchise tax of water and gas utility based on the gross receipts.
Will it be exempt from Local Business Tax?
Yes, same principle. Because local business tax will only be imposed if
the TP is engaged in business.

Prior to VAT, Telecom are covered by 2% OPT. Ruling:

After VAT, Telecom grantees has been removed from the list. Hence, there’s The condo corporation is not subject to local business tax, because they
only one type of franchise grantee that shall be subject to national franchise are not established to earn profits, they are merely just collecting dues
tax, that is gas and water utility. in order to maintain the common areas. Since they are not engaged in
business, no local business tax shall be imposed.
NPC v. BATAAN
G.R. No. 180654, 06 March 2017 ERICSON TELECOM v. PASIG
Exam G.R. No. 176667, 22 November 2007
Read | Exam
Ruling:
The EPIRA law effectively removed the power generation companies from Local Business taxes and other local taxes: The bases of these tax will be
the ambit of local franchise tax. the amount of Gross Annual Receipts for the preceding year.

4. Sand, Gravel and Earth Ericson Argument: basis must only be the collected gross receipts (and
not receivables)
Coverage
Public Lands LGU/Pasig: The basis is the amount collected and the collectibles (gross
revenue) because under NIRC, both must be the basis.
Rate
The amount collected must not exceed 10% of FMV per cubic meter Ruling:
of sand. TP is right, because under the LGC, Gross Receipts has been defined
under IRR as the amount of income already collected. Hence, account
5. Professional Tax receivables are not included.

Definition Section 187, LGC | Appeal Process

Imposed on professionals for the exercise of their profession. GR: Questions of constitutionality of an ordinance must be appealed
before the SOJ within 30 days who must decide within 60 days. If there is
Different from PRC Fees no appeal before the SOJ, any petition filed before the court shall be
PRC collects a fee for the cost of registration dismissed.
XPN: Exception to the Dear Doctrine, such that an appeal to the SOJ is not
Amount considered as plain and speedy remedy.
Must not exceed 300
Note: Section 187 is applicable to both Local Tax and RP Tax
Bar | GPP
Batas Law firm engaged in the practice of legal profession. Grant of Tax Exemption

Is it subject to local business tax? LGU can grant tax exemption or provide relief, only in cases of:
1. Natural Calamity;
No, because the practice of law is not considered as a business. 2. Civil Disturbance; or
3. General Failure of Crops
Is it subject to professional tax?
Period of Exemption
No. The GPP is not subject to professional tax but the lawyers The exemption, when granted, shall take effect in the next calendar year.
themselves are. Because the exemption granted by the LGU shall not exceed 1 year
(Effective Jan to Dec only)
6. Amusement Tax
List of entities enjoys exemption under Special law
Coverage
105 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

• Local Water District;

• Coops reg. under CDA; Remedies of Local Government Units
• NSNP Hosp and Educ Institutions;
• BOI Reg. Companies The remedies depend on the type of tax. The remedies are:
For Pioneer Companies - 6 years 1. Administrative; and
Non-Pioneer - 4 years 2. Judicial
Counted from the date of registration (Start of commercial
operation applies to national or income tax) LGU’s Lien | Tax Lien
• Countryside and Barangay business enterprises; and Unpaid tax shall be considered as encumbrance upon the properties of
• Printer and publisher of books prescribed by Department of the TP.
Education, Culture and Sports (DECS)
ADMINISTRATIVE REMEDIES
Situs of Payment of Local Tax
The government can either:
1. Distraint Proceedings:
Situs a) Issue a certificate in order to start the distraint proceedings;
or
Depends: 2. Levy Proceedings:
• One office – principal office address a) To issue a certificate of assessment; AND
• Different Branches b) To serve notice to TP, assessor and ROD
o Income – where the head office/principal office is located
o Local Taxes – where the branches are located Compromise
• Plantation where the factory is located elsewhere With respect to local taxes the compromise must be made through the
70% divided into (60% paid to LGU where the factory is located Sanggunian.
and 40% paid to the LGU where the plantation is located)
Not covered by Compromise, those:
MUNICIPALTIY of CAINTA v. PASIG 1. Involving Fraud; or
28 June 2017 2. Cases already filed in court
Situs of Taxation
JUDICIAL REMEDY
Uniwide is a Real Estate Developer. It constructed buildings. Based on
the TCT issued by the ROD, the lands are located in Pasig. Hence, The LGU shall file a case in Court for the collection of the tax.
Uniwide secured its building and business permit from Pasig.
Assessment and Collection
In 1997, a year after Cainta and Pasig had filed a case for boundary
dispute over a particular area. Instead of continuing paying taxes of local NIRC
tax to Pasig, it paid to Cainta.
Assessments and Collection
Pasig filed a collection suit against Uniwide. The Periods apply to both Admin and Judicial.

Is it proper for Uniwide to pay Cainta, and stop paying to Pasig? Remember: 3-3 | 10-5

Ruling: LOCAL
For purpose of complying with Local Tax liabilities, the TP is entitled to
rely on the location stated in the TCT. Hence, the TP shall pay to Pasig. Period to Assess
5 years from the date the tax becomes due (no filing of return for local
Further, the TP first registered with the Pasig, hence, it is but proper to taxes)
pay to Pasig.
Accrual of Tax | Tax Due
What would happen if the case turned unfavorably against Pasig? First of January

Presume regularity, all payments made to Pasig shall be considered as According to Bureau Local Government Finance Opinion, the
valid. phrase ‘date becomes due’ pertains to the date of the accrual of the
tax i.e. January 1.
Note: Do not apply the rules in Real Property Tax.
Date of Payment
STA. LUCIA REALTY & DEV’T, Inc. v. PASIG Within 20 days within January or after the close of the quarter, if the TP
G.R. No. 166838, 15 June 2011 will pay on a quarterly basis.
Real Property Tax
Period to Collect
Ruling: 5 years from the date of assessment
For RP taxes, the TP cannot rely on the location stated in the TCT.
Extraordinary Period to Assess
The Court ordered the TP to deposit the amount in an Escrow Account. 10 years counted from the discovery of the fraud

Extraordinary Period to Collect

Interest and Surcharge
5 years to collect from the date of assessment.

Interest Rate
REAL PROPERTY TAX
The interest shall be 2% per month but not exceeding 36 months. Hence,
maximum to imposed on delinquency taxes is 72%.
Period
The same as Local Tax
Surcharge Rate
25%
Suspension of Period to Assess and Collect
Trivia: Check if the ordinance indicate interest and surcharge. Otherwise,
the LGU cannot impose the same. Instances to suspend the period to assess and collect:
1. When the treasurer is prevented from making an assessment or
from collecting the tax;
Assessment and Collection of Local Taxes Same as Section 223, NIRC;
106 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

2. When the TP filed a request for reinvestigation and a TP executes a

INT’L CONTAINER TERMINAL v. MANILA
waiver of the statute of limitations
Under the NIRC, the request must be granted. 17 October 2018
Under the LGC, there is no such requirement i.e. no need to be
Exam
granted.
3. When the TP is out of the PH or cannot be found
The receipt issued by Manila are notices of
Taxpayer’s Remedies assessment.
ADMINISTRATIVE REMEDIES
Ruling
Remedies Before Assessment
The receipts (although it indicates the amount paid
GR: The TP can either question the constitutionality of the ordinance and by the TP) are not considered notice of assessment,
file a petition for declaratory relief.
XPN: It is possible that the TP will no longer question the constitutionality because it does not contain the nature of the tax, fee
of the ordinance before the SOJ and immediately file a petition for or charge being collected by the LGU.
declaratory relief.
Provided, that the case falls within the exception to the DEAR doctrine,
Receipt of Notice | Recourse
such that there is no longer speedy and adequate remedy.
Upon receipt of the TP, the recourse of the TP is to file a protest

ANGELES CITY v. ANGELES CITY ELEC CORP

Period to File a Protest
G.R. No. 166134, 29 June 2010
NIRC – 30 days
Prohibition re injunction on tax collection not applicable to local
Local Tax – 60 days
taxes
RP Tax – 30 days

“Nakalimutan ata i-discuss ni maam lol”

Where filed?
Local treasurer (LT) who issued the NOA
Process of Questioning the Constitutionality of a Tax Ordinance
• File an appeal before the SOJ; Days to act on the Protest
The appeal must be filed within 30 days from the effectivity of the The LT has 60 days to act on the protest
ordinance.
The appeal before the SOJ is only applicable for tax ordinance Appeal to RTC
(Section 187) If there is an action. Remedy of TP is to file an appeal before the RTC,
• The SOJ has 60 days to decide. because it is a case incapable of pecuniary estimation. The RTC will take
Inaction of the SOJ will be treated as implied denial. cognizance in its Original Jurisdiction (Yamane v. Lepanto)
• Elevate the case before the RTC
Notice of appeal is not required, because such case is an original Period to appeal
action. Because the decision of the SOJ is not considered a decision Within 30 days
of a judicial court that is subject to an appeal through notice of
appeal or PFR. Inaction of LT, it is considered as Implied Denial (Team Pacific v. Daza, 11
• File a case before the CTA Division July 2011)
• MR/MNT
• Appeal before the CTA En Banc Recap
• Rule 45 | SC Protest: LT > RTC > CTA Division > MR MNT > CTA En Banc > SC

No suspension of the accrual and payment of tax REFUND

There can be no suspension of the accrual of tax liability despite the Section 196, LGC
pendency of the appeal before the SOJ.
Written Claim for Refund
REMEDIES AFTER ASSESSMENT Start with a WCFR, filed before the LT, within 2 years from date of
payment
a) The TP can file a protest; Under 229, WCFR is also mandatory, except if the overpayment appears
b) The TP can file a claim for refund, if the TP already paid the tax; on the face of the return.
c) The TP can redeem the property, if the properties had already been
sold Supervening Event considered
The TP can redeem the property within 1 year from the date of sale Under the LGC, consider supervening event, unlike Section 229
or foreclosure which states “regardless of supervening event”.

JUDICIAL REMEDIES Judicial Claim for Refund

Filing for a JCFR, must be filed within the same 2-year period
REMEDIES AFTER ASSESSMENT Same with the 229 i.e. within the same 2-year period.

a) The TP can file a petition for declaratory relief; or JCFR | Where filed?
b) The TP can file an injunction Under 229, it is filed before the CTA Division.
Under LGC, depends of the Jurisdictional Amount i.e. 300 000/400
PROTEST 000
Section 195, LGC
Refund Process
Note: The LOA, NIC, and PAN are only applicable to NIRC. • MTC > RTC > CTA En Banc > SC
• RTC > CTA Division > MR/MNT > CTA En Banc > SC
In Local Tax, the process starts with a notice of assessment.
INT’L CONTAINER TERMINAL v. MANILA
Notice of Assessment G.R. No. 185622, 17 October 2018
A Notice of Assessment (for local tax) is a document which contain Exam
1. Nature of the Tax Fee or Charge
2. Amount of Deficiency, Surcharge, Interests and Penalties WON the TP should adopt Section 195 or 196, LGC.

107 | KAMM Notes

 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Ruling:
Difference between section 195 and 196 Fundamental Principles
1. Section 195 | Protest: Applicable if the TP received the assessment
and does not pay the tax.
Transfer Tax – GSP or FMV, whichever is higher. The FMV in RPT, does
Section 196 | Refund: Applicable if there is no NOA issued by the
not include zonal value.
LT and the TP claims that it erroneously paid the tax.
2. Section 195: There is a need to issue a NOA and only upon the
Taxable base of RPT
receipt of AN that the TP is required to file a protest within 60 days
thereof. Can RPT be based on the GSP?

In this case, the LGU assessed taxes (don’t immediately assume that No, because if the taxable base is GSP, it violates one of the fundamental
there is already AN issued, assessed means there is only computation of principles in local tax i.e. the appraisal and collection shall not be let to a
the tax liability) with respect to local tax. The TP paid the tax, after private person.
payment, the LGU issued receipts.
Allied Banking Corp v. Quezon City
The TP filed a protest but its contents appeared to be one for a WCFR. G.R. No. 154126, 15 September 2006
They paid the tax in order to process their business permits but claimed
that the assessment has no legal basis. Ruling:
The GSP cannot be used as basis for the computation of RPT.
Ruling:
Section 196 is applicable because there was no NOA issued by the LGU. Note: Only apply this principle on RPT.

Counterargument of LGU: There is NOA i.e. receipt. Hence, the remedy

of the TP should have been to file a protest, and since there was no
protest, the assessment is final and executory.
Supreme Court: The receipts are not considered as NOA.
In order for a document to be NOA, it has to contain the (a) nature and
the (b) amount of the tax, fee or charge being collected. In this case, it
does not indicate the nature of the tax being collected. Hence, section
196 applies, there is a proper claim for refund before the LT.
ANOTHER CASE
2018
JCFR | Supervening Event
Rule: WCFR and JCFR must be filed within 2 years from date of
payment.
TP filed a WCFR before the LT questioning the legality of the tax
ordinance, it was denied. TP went to RTC, then CTA Division. At the CTA
En Banc, the provision in the ordinance was nullified.
Proper Recourse | Section 196: WCFR > JCFR filed before MTC/RTC
(Jurisdictional Amount) > CTA Division > MR/MNT > CTA En Banc
In this case | Section 195: WCFR > TP filed a protest on the NOA > RTC >
CTA division
Note: Section 195 and 196 are different courses.
Date of Payment: 2010
WCFR: 2011
However, there was no JCFR within the 2-year period. The TP only filed
the JCFR after the decision before the CTA En Banc, when the ordinance
was nullified in 2016.
Was the JCFR filed within the prescriptive period provided under the law?
Imposition
Capitol Wireless v. Provincial Treasurer of Batangas
G.R. No. 180110, 30 May 2016
Ruling:
Submarine Cable Lines, regardless if it’s just a cable, cable wires are
necessary for the business of the TP, hence, it is considered as RP.
Moreover, it is attached to an immovable property which is the water.
Meralco v. City Assessor & City Treasurer of Lucena City
G.R. No. 166102, 5 August 2015
Read
Properties Exempt
Section 234, LGC
Memorize the List of Properties exempt from Tax
Section 234. Exemptions from Real Property Tax. - The following are
exempted from payment of the real property tax:
(a) RP owned by the Republic or any of its political subdivisions
except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries
and all lands, buildings, and improvements ADE used for
religious, charitable or educational purposes;
(c) All machineries and equipment that are ADE used by local water
districts and GOCCs engaged in the supply and distribution of
water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as
provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and

Ruling:
environmental protection.
Yes. It was filed during the 2-year period, because the nullification is
considered as supervening event. Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by, all
We consider supervening event in Local Taxes. Hence, the refund has persons, whether natural or juridical, including all government-
not yet been barred by prescription. owned or controlled corporations are hereby withdrawn upon the
effectivity of this Code.
CITY OF MANILA v. HON. GRECIA-CUERDO
G.R. No. 175723, 04 February 2014 MIAA v. Paranaque
Judicial Claim G.R. No. 155650, 20 July 2006

WON the CTA can take cognizance petitions for certiorari questioning the MIAA is instrumentality, hence, exempt from both local and RP tax,
decision of the RTC in local tax cases? except portions being leased to taxable entities.

Ruling Lung Center v. QC

Yes, the CTA has jurisdiction over petitions for certiorari challenging the 29 June 2004
decision of the RTC in local tax cases. Under RA 9282, it had impliedly
included petitions for certiorari. Lung Center is a NSNP Hosp Institution. 1st floor is being leased to
private doctors. The hospital caters to paying and non-paying patients.
There is also an idle lot.
REAL PROPERTY TAX
108 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

Is the property exempt from RPT?

Lim executed a mortgage in favor of GSIS. Lim wasn’t able to pay the
Under Section 28(3), Article VI, PC. All lands, buildings and loan. Hence, foreclosure. During the redemption period, Lim was not
improvements ADE used for religious, charitable, or educational able to pay.
purposes shall be exempt from taxation.
Rule: If the mortgager was not be able to pay during the redemption
1. Test of Charity. Act of accepting paying patients will not period, there would be consolidation in favor of the higher bidder.
derogate its character as a charitable institution, as long as
it had passed the test of charity. In this case, after consolidation, GSIS will become owner. GSIS leased the
However, with respect to the area being leased to private doctors, property to different individuals.
it will not be exempt from tax.
Heirs of Lim realized that they should purchase the property back from
2. Predominance Test. Under Section 30 of the Tax Code, it GSIS. Hence, they purchased it back.
shall be subject to tax. But the SC shall apply the
predominance test Section 27. However, because it is a The Government is collecting for RPT after consolidation of ownership
proprietary hospital the BIR should apply the up to the time of repurchase/sale to the heirs of Lim.
predominance test.
Ruling:
Predominance Test: The heirs of Lim cannot be held liable for the RPT with respect to such
50% or more related – 10% period, because it was not the owner nor the beneficial owner, thereof.
50% or more unrelated – 30%
The liable entities should have been the lessees for being the beneficial
Thus, if a NSNPEI or H derived income from a proprietary activity users but the SC cannot hold them liable because they were not
then do not immediately subject the income to 30% because the impleaded in the case.
applicable provision is Section 27 with respect to the income
derived from the proprietary activity. Hence, apply the PROTEST OF REAL PROPERTY TAX
predominance test.
Issuance of NOA by the Local Assessor
Idle Lot: RPT concentrate on Actual Use. Hence, not subject to tax, the
Erroneous Assessment: Illegal Assessment:
phrase “ADE” means solely use for charitable purpose. Don’t apply the
(a) Computation of Tax; or Questioning the authority of LA
doctrine in Abra Valley which states that incidental use shall be likewise
(b) WON the property is subject to to issue the assessment.
covered by RPT Exemption.
RP Tax (NPC Case)
Payment | Protest Payment | Protest
NAPOCOR v. Province of Quezon
Payment must be under protest (it Payment under protest is no
G.R. No. 171586, 15 July 2009
is not applicable in Local Taxes) longer necessary
Section 234(c), LGC
Section 252, LGC
NPC and Mirant entered into a Build and Operate and Transfer (BOT)
Protest must be within 30 days,
agreement. Owner is Mirant. The ownership will be transferred to NPC.
filed before the LT (not LA)
NPC was claiming that the property shall be exempt from RPT because
it was being used for the generation of the electricity.
Decide within 60 days
LBAA RTC
Section 234 (c) All machineries and equipment that are ADE
Protest within 60 days
used by local water districts and GOCCs engaged in the supply
Note: LBAA will only acquire
and distribution of water and/or generation and
Decide 120 days jurisdiction if it deals with
transmission of electric power.
question of fact (NPC case)
Section 234(c), LGC talks about ownership and usage. Ownership must CBAA
be by local water districts or GOCCs. In this case, Mirant is not a GOCC, Appeal within 30 days
rather it is a private corporation.
Note:
Argument of NPC: Under the BOT agreement, the ownership will be CTA En Banc
transferred subsequently. PFR before the 15 days
Supreme Court
Ruling:
The right of NPC over the properties is merely speculative. Hence, Taxpayer’s Remedies
Mirant is still the owner and the beneficial owner of the machineries
and equipments. Hence, the properties are not exempt from tax.
REFUND OF REAL PROPERTY TAX

Remember: Agusan Case

Written Claim for Refund
WCFR before the LT within 2 years
Read the Other Cases
Judicial Claim for Refund
Persons liable for RPT JCFR before the LBAA

Entities liable for RPT Recap | JCFR

(a) Owner; and Local Tax – Depends on the Jurisdictional Amount
(b) Beneficial User (only if the owner is exempt from tax but the NIRC – CTA Division
property is being used by a taxable entity) RPT – Same as Protest. Hence, LT > LBAA > CBAA > CTA En Banc > SC.
Note: Tax declaration is not an evidence of ownership. Possession
and usage are considered as evidence. HABAWEL v. CTA
G.R. No. 171033, 03 August 2010
OWNER v. USER Mandamus

Testate Estate of Concordia Lim v. Manila Ruling:

21 February 2000 Mandamus is not a proper remedy in questioning the action of the LA
and LT because these are not considered as ministerial functions.
Who will pay the RPT when the property is foreclosed in favor of
GSIS? Nestle Ph

109 | KAMM Notes


(Exam)
Nestle filed a refund before the collector, inaction for 6 years. The Nestle
went directly to the CTA.
Ruling:
The Tariff and Customs Code did not provide any period for the
collector to decide.
Further, the COC shall issue first verification to such claim, without such
the CTA cannot acquire jurisdiction for cases on custom duties. Except,
inordinate delay.
In this case, the Supreme Court held that 6 years is not inordinate delay
(lmao)
Benevola De Cebu
(Exam)
Benevola is a proprietary hospital. It constructed a center incidental to
its operation. The center was utilized for lease. Hence, subject to RPT.
How should it be assessed?
Special or Commercial.
Ruling:
Special Assessment, because of its incidental use.
Tax Exception – Sole Actual Use
RPT Assessment – Incidental Use
For purposes of assessing a property in the computation of RPT, the
incidental use shall be considered. If the property is incidentally use, the
valuation of its main purpose shall be used for valuing the property for
its RPT.
IV. JUDICIAL REMEDIES
Jurisdiction of the CTA
Highly Mandate | Read & Memorize
Exclusive Appellate Jurisdiction
"1. Decisions of the CIR in cases involving DROP cases;
"2. Inaction by the CIR in cases involving DROP cases, where the NIRC provides a specific
period of action, in which case the inaction shall be deemed a denial;
"3. Decisions, orders or resolutions of the RTC in local tax cases originally decided or
resolved by them in the exercise of their original or appellate jurisdiction;
"4. Decisions of the COC in cases involving liability for customs duties, fees or other
money charges, seizure, detention or release of property affected, fines, forfeitures or
other penalties in relation thereto, or other matters arising under the Customs Law or
other laws administered by the BOC;
"5. Decisions of the CBAA in the exercise of its appellate jurisdiction over cases involving
the assessment and taxation of real property originally decided by the provincial or city
board of assessment appeals;
"6. Decisions of the SOF on customs cases elevated to him automatically for review from
decisions of the COC which are adverse to the Government under Section 2315 of the
Tariff and Customs Code;
"7. Decisions of the Sec of DTI, in the case of nonagricultural product, commodity or
article, and the Secretary of Agriculture in the case of agricultural product, commodity
or article, involving dumping and countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard measures under Republic
Act No. 8800, where either party may appeal the decision to impose or not to impose
said duties.
Jurisdiction over cases involving Criminal
Offenses
"1. EOJ over all criminal offenses arising from violations of the NIRC or Tariff and
Customs Code and other laws administered by the BIR or the BOC.
Provided, however, That offenses or felonies mentioned in this paragraph where the
principal amount o taxes and fees, exclusive of charges and penalties, claimed is less
2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w
than P1,000,000.00 or where there is no specified amount claimed shall be tried by the
regular Courts and the jurisdiction of the CTA shall be appellate. Any provision of law or
the ROC to the contrary notwithstanding, the criminal action and the corresponding
civil action for the recovery of civil liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in the same proceeding by the
CTA, the filing of the criminal action being deemed to necessarily carry with it the filing
of the civil action, and no right to reserve the filling of such civil action separately from
the criminal action will be recognized.
"2. Exclusive appellate jurisdiction in criminal offenses:
"a. Over appeals from the judgments, resolutions or orders of the RTC in tax cases
originally decided by them, in their respected territorial jurisdiction.
"b. Over PFR of the judgments, resolutions or orders of the RTC in the exercise of
their appellate jurisdiction over tax cases originally decided by the MTC in their
respective jurisdiction.
"c. Jurisdiction over tax collection cases as herein provided:
"1. EOJ in tax collection cases involving final and executory assessments
for taxes, fees, charges and penalties: Provided, however, That collection
cases where the principal amount of taxes and fees, exclusive of charges
and penalties, claimed is less than P1,000,000.00 shall be tried by the
proper MTC and RTC.
"2. Exclusive appellate jurisdiction in tax collection cases:
"a. Over appeals from the judgments, resolutions or orders of the
RTC in tax collection cases originally decided by them, in their
respective territorial jurisdiction.
"b. Over PFR of the judgments, resolutions or orders of the RTC in
the Exercise of their appellate jurisdiction over tax collection cases
originally decided by the MTC, in their respective jurisdiction."
When and where should these cases be filed?
i. Civil Cases
Exams
CIR issued a AN. The TP filed a protest. Later, CIR issued a FDDA. After the
receipt of the FDDA, the TP filed a case before the RTC, for declaratory
relief and TRO.
Declaratory Relief a proper remedy?
No, because there is already a breach on the issuance of the
assessment.
What is the proper remedy?
The proper remedy is to file a PFR before the CTA, because if the TP
did not file a PFR, the assessment becomes final, executory and
demandable.
Will the filing of the DR toll the running of the period?
Further, the filing of Declaratory Relief does not toll the running of
the period of the 30-day period for the filing of the PFR.
Can the RTC issue injunction?
RTC cannot issue injunction for the collection of tax. Because, aside
from Section 218, there is only one court which is authorized to
issue injunction, the CTA.
Note: This is the promulgation by the Court in the case of Standard
Insurance.
CIR v. STANDARD INSURANCE
November 2018
Ruling:
1. The remedy of the TP is erroneous. The TP should have filed a PFR
before the CTA after the receipt of the FDDA.
2. It is erroneous for the TP to ask for an injunction from the RTC.
RTC does not have the authority to issue injunction for the
collection of the tax.
3. Only the CTA has the authority to issue injunction for the
collection of the tax. If and only if, in can be shown that the
collection of the tax will jeopardize the interest of the TP and/or
the Government.
110 | KAMM Notes
 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

expressed the view that Section 2 had technically given an authority in

Collection Cases favor of the legal officers of the CIR to represent the government.

Where? Ruling:
GR: Depends on the Jurisdictional Amount. The CIR Legal officers do not have any authority to represent the State
in appeal proceedings, even if it involves tax cases. Because their power
Within Metro Manila Outside Metro Manila under Section 2 pertains only to institution of civil or criminal cases.
MTC 400 000 and below 300 000 and below
RTC Above 400 000 Above 300 000
Jurisdiction of CTA En Banc in the Nullification of
XPN: Judgments
Under RA 9282 and the Revised Rules governing the CTA
The CTA Division shall acquire original jurisdiction in tax collection cases, Does the CTA En Banc have the power to nullify judgments?
involving final and executory assessments for taxes, fees and charges,
where the principal amount, exclusive of charges and penalties claim, is 1 CIR v. KEPCO
000 000 or more. G.R. No. 199422, 21 June 2016
Jurisdiction of CTA En Banc in the nullification of judgments
Material Elements | CTA Division
• Final, and executory. Kepco filed an Admin Claim and Judicial Claim for refund. CTA Division
• Amount of 1 000 000 (exclusive of charges and penalties) granted the refund. No MR filed by the CIR, hence, the decision becomes
final and executory and a corresponding entry for judgment has been
Suppose: issued.
• P 300 000 - MTC
• P 400 000 - RTC After the writ of execution, it was question by the CIR. Argued that she
• P 1 000 000 or more (not final and executory) – CTA Division did not receive the decision, therefore the writ is considered as null and
• P 1 000 000 or more (if final and executory) – CTA Division void.

ii. Criminal Cases The CIR filed the petition for annulment to the CTA En Banc.

Jurisdiction Penalty WON the CTA En Banc has jurisdiction?

GR:
6 years and below – MTC
6 years or more - RTC
XPN:
Under RA 9282 and the revised rules governing the CTA
The CTA Division | Original Jurisdiction all criminal offenses, arising from
NIRC and TCC and other laws administered by the BIR or BOC, where the
principal amount of taxes and fees, exclusive of charges and penalties
claim, is 1 000 000 or more (no need to determine if final and executory)
Suppose:
• More than 6 years and less than 1 000 000 – RTC
• No amount, more than 6 years – RTC
• No amount, less than 6 years – MTC
• Amount is exactly 1 000 000 – CTA Division
No Right to Reserve the filing of a civil case
There is no right to reserve the filing of a civil case in instituting a criminal
case (i.e. tax evasion case).
It is not possible, there is no principle of hierarchy with collegiate courts.
Provision (Exam):
Annulment of judgments involves the exercise of original jurisdiction.
The divisions are not considered as separate and distinct courts but are
divisions of one and the same courts. There is no hierarchy of courts for
they each remain as one court notwithstanding that they also work in
divisions.
The silence of the rules, may be attributed to the need to preserve the
principle that there can be no hierarchy between collegial courts,
between its divisions and the En Banc.
Remedy:
The remedy should have been to file for a petition for certiorari under
Rule 65 before the SC.
Prescriptive Period for Criminal Cases
Section 281, NIRC

Memorize: Appellate Jurisdiction of the CTA Division provided under SEC. 281. Prescription for Violations of any Provision of this Code. - All
the revised rules governing the jurisdiction of the CTA violations of any provision of this Code shall prescribe after Five (5) years.

Appellate Jurisdiction of the CTA Division Prescription shall begin to run from the day of the commission of the
In criminal case: violation of the law, and if the same be not known at the time, from the
discovery thereof and the institution of judicial proceedings for its
investigation and punishment.
CTA: Appeals from the judgment, resolutions or order of the RTC in their
original jurisdiction in criminal offenses. The prescription shall be interrupted when proceedings are instituted
against the guilty persons and shall begin to run again if the proceedings
RTC: Original jurisdiction, if the amount being claimed is less than 1 000 are dismissed for reasons not constituting jeopardy.
000, or if there is no specified amount, and if more than the imposable
penalty. The term of prescription shall not run when the offender is absent from
the Philippines.

Appeal Process
Period
• MTC > RTC > CTA En Banc
Five (5) years from
• RTC > CTA Division > CTA En Banc
1. Commission, violation or discovery; AND
• LBAA > CBAA > CTA En Banc
2. Institution of a Judicial Proceedings for its investigation

Appellate Jurisdiction of the CTA En Banc

Lim v. CA
Orders and Resolutions of the CTA Division involving the decisions of the
G.R. Nos. 48134-37, 18 October 1990
CIR in its original decision. Re: Prescription of Criminal Actions | Section 281, NIRC

CIR v. LA SUERTE CIGAR
G.R. No. 144942, 4 July 2002
Re: Participation of the Solicitor General
The CIR Legal Division represented the State for the appeal filed before
the CTA Division. The CTA Division required the SG to appear, SG
Fraud discovered 1964. More than 10 years thereafter, the CIR filed an
affidavit complaint before the Prosecutor.
Note: Hence, the filing of criminal complaint is practically
imprescriptible.

111 | KAMM Notes

 2 0 2 0 - 2 0 2 1 B a r | T a x a t i o n L a w

TP: Prescribed, Because 5 years from 1964

SG: The law states, there are 2 requirements (i.e.
Commission/Discovery AND institution of judicial proceedings)

Ruling:
SG is correct. Judicial proceedings, there must be an institution of the
affidavit complaint before the Office of the City/Provincial Prosecutor.

Tax cases (Crim) are practically imprescriptible.

Judy Ann Santos v. PP

G.R. No. 173176, 26 August 2008

A criminal case for tax evasion was filed before the CTA Division against
Judy Ann. When she learned that the tax evasion against Regine case
was dismissed, she filed a Motion to Quash alleging Equal Protection.
That when the Gov’t dismissed the case against Regine the Gov’t should
have dismissed the case against her.

Is there violation of Equal Protection Clause?

Two characteristics of Equal Protection: Enactment and

Implementation

Here, there is a question of the implementation of the law.

Ruling (Substantive)
The Government agencies are tasked to determine the manner on how
the law shall be implemented, assume regularity.

In order for the TP to argue Equal Protection, he must establish that

there is clear and unjust discrimination. In this case, Judy Ann failed to
established such.

Ruling (Remedial)

Motion to Quash was denied.

The lawyer filed a motion for extension to file a PFR which was denied
by the CTA Division on the ground that the Motion to Quash was
considered as interlocutory order, hence, it is not appealable.

Interlocutory orders are not appealable.

Further, it cannot be questioned under certiorari, except under

exceptional cases. Thus, only question it after trial on the merits.

SC: Court orders denying a motion to quash is interlocutory, it is not

immediately appealable nor can be it be a subject for certiorari. It may
only be reviewed by an appeal from the judgment after trial on the
merits.

However, under exceptional circumstances, recourse for a petition for

certiorari for an interlocutory order is now recognized.

In this case, Judy Ann was not able to established that her case falls
under exceptional circumstance. Hence, CTA En Banc did not err in
denying the motion for extension on the ground that the denial of the
motion, being an interlocutory order, is not immediately appealable.

112 | KAMM Notes